Years: 2018, 2019, 2020, 2021, 2022
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
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| Year Ended June 30, |
| 2022 |
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| Revenue: |
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| Product |
| $ | |
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| Service and other |
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| Total revenue |
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| Cost of revenue: |
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| Product |
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| Service and other |
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| Total cost of revenue |
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| Gross margin |
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| Research and development |
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| Sales and marketing |
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| General and administrative |
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| Operating income |
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| Other income, net |
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| Income before income taxes |
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| Provision for income taxes |
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| Net income |
| $ | |
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| $ | |
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| $ | |
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| Earnings per share: |
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| Basic |
| $ | |
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| $ | |
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| $ | |
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| Diluted |
| $ | |
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| $ | |
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| $ | |
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| Weighted average shares outstanding: |
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| Basic |
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| Diluted |
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Refer to accompanying notes.
57
PART II
Item 8
COMPREHENSIVE INCOME STATEMENTS
| (In millions) |
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| Year Ended June 30, |
| 2022 |
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| 2021 |
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| 2020 |
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| Net income |
| $ | |
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| $ | |
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| $ | |
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| Other comprehensive income (loss), net of tax: |
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| Net change related to derivatives |
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| Net change related to investments |
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| Translation adjustments and other |
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| Other comprehensive income (loss) |
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| ( | ) |
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| Comprehensive income |
| $ | |
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| $ | |
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| $ | |
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Refer to accompanying notes.
58
PART II
Item 8
BALANCE SHEETS
| (In millions) |
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| June 30, |
| 2022 |
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| 2021 |
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| Assets |
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| Current assets: |
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| Cash and cash equivalents |
| $ | |
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| $ | |
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| Short-term investments |
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| Total cash, cash equivalents, and short-term investments |
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| Accounts receivable, net of allowance for doubtful accounts of $ |
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| Inventories |
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| Other current assets |
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| Total current assets |
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| Property and equipment, net of accumulated depreciation of $ |
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| Operating lease right-of-use assets |
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| Equity investments |
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| Goodwill |
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| Intangible assets, net |
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| Other long-term assets |
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| Total assets |
| $ | |
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| $ | |
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| Liabilities and stockholders’ equity |
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| Current liabilities: |
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| Accounts payable |
| $ | |
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| $ | |
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| Current portion of long-term debt |
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| Accrued compensation |
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| Short-term income taxes |
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| Short-term unearned revenue |
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| Other current liabilities |
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| Total current liabilities |
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| Long-term debt |
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| Long-term income taxes |
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| Long-term unearned revenue |
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| Deferred income taxes |
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| Operating lease liabilities |
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| Other long-term liabilities |
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| Total liabilities |
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| Commitments and contingencies |
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| Stockholders’ equity: |
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| Common stock and paid-in capital – shares authorized |
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| Retained earnings |
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| Accumulated other comprehensive income (loss) |
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| ( | ) |
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity |
| $ | |
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| $ | |
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Refer to accompanying notes.
59
PART II
Item 8
CASH FLOWS STATEMENTS
| (In millions) |
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| Year Ended June 30, |
| 2022 |
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| 2021 |
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| 2020 |
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| Operations |
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| Net income |
| $ | |
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| $ | |
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| $ | |
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| Adjustments to reconcile net income to net cash from operations: |
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| Depreciation, amortization, and other |
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| Stock-based compensation expense |
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| Net recognized gains on investments and derivatives |
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| ( | ) |
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| ( | ) |
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| ( | ) |
| Deferred income taxes |
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| ( | ) |
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| ( | ) |
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| Changes in operating assets and liabilities: |
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| Accounts receivable |
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| ( | ) |
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| ( | ) |
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| ( | ) |
| Inventories |
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| ( | ) |
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| Other current assets |
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| Other long-term assets |
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| Accounts payable |
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| Unearned revenue |
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| Income taxes |
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| ( | ) |
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| Other current liabilities |
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| Other long-term liabilities |
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| Net cash from operations |
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| Financing |
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| Cash premium on debt exchange |
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| ( | ) |
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| Repayments of debt |
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| Common stock issued |
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| Common stock repurchased |
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| ( | ) |
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| ( | ) |
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| Common stock cash dividends paid |
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| Other, net |
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| Net cash used in financing |
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| Investing |
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| Additions to property and equipment |
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| Acquisition of companies, net of cash acquired, and purchases of intangible and other assets |
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| Purchases of investments |
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| Maturities of investments |
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| Sales of investments |
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| Other, net |
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| ( | ) |
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| Net cash used in investing |
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| ( | ) |
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| Effect of foreign exchange rates on cash and cash equivalents |
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| Net change in cash and cash equivalents |
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| ( | ) |
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| Cash and cash equivalents, beginning of period |
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| Cash and cash equivalents, end of period |
| $ | |
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| $ | |
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| $ | |
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Refer to accompanying notes.
60
PART II
Item 8
STOCKHOLDERS’ EQUITY STATEMENTS
| (In millions, except per share amounts) |
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| Year Ended June 30, |
| 2022 |
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| 2021 |
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| 2020 |
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| Common stock and paid-in capital |
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| Balance, beginning of period |
| $ | |
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| $ | |
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| $ | |
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| Common stock issued |
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| Common stock repurchased |
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| ( | ) |
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| ( | ) |
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| ( | ) |
| Stock-based compensation expense |
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| Other, net |
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| ( | ) |
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| Balance, end of period |
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| Retained earnings |
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| Balance, beginning of period |
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| Net income |
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| Common stock cash dividends |
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| ( | ) |
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| ( | ) |
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| ( | ) |
| Common stock repurchased |
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| ( | ) |
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| ( | ) |
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| ( | ) |
| Cumulative effect of accounting changes |
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| ( | ) |
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| Balance, end of period |
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| Accumulated other comprehensive income (loss) |
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| Balance, beginning of period |
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| ( | ) |
| Other comprehensive income (loss) |
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| ( | ) |
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| ( | ) |
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| Cumulative effect of accounting changes |
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| Balance, end of period |
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| ( | ) |
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| Total stockholders’ equity |
| $ | |
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| $ | |
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| $ | |
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| Cash dividends declared per common share |
| $ | |
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| $ | |
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| $ | |
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Refer to accompanying notes.
61
PART II
Item 8
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.
In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
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Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.
Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
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Item 8
Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Contract Balances and Other Receivables
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
As of June 30, 2022 and 2021, other receivables due from suppliers were $
As of June 30, 2022 and 2021, long-term accounts receivable, net of allowance for doubtful accounts, was $
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
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Item 8
Activity in the allowance for doubtful accounts was as follows:
| (In millions) |
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| Year Ended June 30, |
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| 2022 |
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| 2021 |
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| 2020 |
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| |||
| Balance, beginning of period |
| $ | |
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| $ | |
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| $ | |
|
| Charged to costs and other |
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| |
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| |
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| |
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| Write-offs |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| |||
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| Balance, end of period |
| $ | |
|
| $ | |
|
| $ | |
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Allowance for doubtful accounts included in our consolidated balance sheets:
| (In millions) |
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| June 30, |
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| 2022 |
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| 2021 |
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| 2020 |
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| |||
| Accounts receivable, net of allowance for doubtful accounts |
| $ | |
|
| $ | |
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| $ | |
|
| Other long-term assets |
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| |||
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| Total |
| $ | |
|
| $ | |
|
| $ | |
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We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2022 and 2021, our financing receivables, net were $
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
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PART II
Item 8
Research and Development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
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Item 8
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
Derivatives
Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
| • | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. |
|
| • | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain over-the-counter forward, option, and swap contracts. |
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PART II
Item 8
|
| • | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. |
We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use,
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
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PART II
Item 8
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from
Recent Accounting Guidance
Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. We adopted the standard effective July 1, 2021. Adoption of the standard did not have a material impact on our consolidated financial statements.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as follows:
| (In millions, except earnings per share) |
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| Year Ended June 30, |
| 2022 |
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| 2021 |
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| 2020 |
| |||
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| Net income available for common shareholders (A) |
| $ | |
|
| $ | |
|
| $ | |
|
| Weighted average outstanding shares of common stock (B) |
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| |
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| |
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| |
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| Dilutive effect of stock-based awards |
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| Common stock and common stock equivalents (C) |
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| Earnings Per Share |
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| Basic (A/B) |
| $ | |
|
| $ | |
|
| $ | |
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| Diluted (A/C) |
| $ | |
|
| $ | |
|
| $ | |
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Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
| (In millions) |
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| Year Ended June 30, |
| 2022 |
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| 2021 |
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| 2020 |
| |||
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| |||||||||
| Interest and dividends income |
| $ | |
|
| $ | |
|
| $ | |
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| Interest expense |
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| ( | ) |
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| ( | ) |
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| ( | ) |
| Net recognized gains on investments |
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| |
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| |
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| Net gains (losses) on derivatives |
|
| ( | ) |
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| |
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| |
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| Net gains (losses) on foreign currency remeasurements |
|
| ( | ) |
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| |
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| ( | ) |
| Other, net |
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| ( | ) |
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| ( | ) |
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| Total |
| $ | |
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| $ | |
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| $ | |
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69
PART II
Item 8
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as follows:
| (In millions) |
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| Year Ended June 30, |
| 2022 |
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| 2021 |
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| 2020 |
| |||
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| Realized gains from sales of available-for-sale securities |
| $ | |
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| $ | |
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| $ | |
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| Realized losses from sales of available-for-sale securities |
|
| ( | ) |
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| ( | ) |
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| ( | ) |
| Impairments and allowance for credit losses |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| |||
| Total |
| $ | ( | ) |
| $ | |
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| $ | ( | ) |
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Net recognized gains (losses) on equity investments were as follows:
| (In millions) |
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| Year Ended June 30, |
| 2022 |
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| 2021 |
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| 2020 |
| |||
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| |||||||||
| Net realized gains on investments sold |
| $ | |
|
| $ | |
|
| $ | |
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| Net unrealized gains on investments still held |
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| |
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| |
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| |
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| Impairments of investments |
|
| ( | ) |
|
| ( | ) |
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| ( | ) |
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| |||
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| |||
| Total |
| $ | |
|
| $ | |
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| $ | |
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|
|
70
PART II
Item 8
NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
| (In millions) |
| Fair Value Level |
|
| Adjusted Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
PART II
Item 8
| (In millions) |
| Fair Value Level |
|
| Adjusted Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2022 and 2021, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized |
|
| Fair Value |
|
| Unrealized |
|
| Total |
|
| ||||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Municipal securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
PART II
Item 8
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
|
|
| Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
|
| Fair Value |
|
|
| Unrealized |
|
|
| Fair Value |
|
|
| Unrealized |
|
|
| Total |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Municipal securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.
Debt Investment Maturities
| (In millions) |
| Adjusted Cost Basis |
|
| Estimated Fair Value |
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Due in one year or less |
| $ | |
|
| $ | |
|
| Due after one year through five years |
|
| |
|
|
| |
|
| Due after five years through 10 years |
|
| |
|
|
| |
|
| Due after 10 years |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currencies
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.
Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Interest Rate
Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.
73
PART II
Item 8
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
| (In millions) |
| June 30, 2022 |
|
| June 30, 2021 |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
| $ | |
|
| $ | |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Interest rate contracts purchased |
|
| |
|
|
| |
|
|
|
|
| ||||||
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
|
| |
|
|
| |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Other contracts purchased |
|
| |
|
|
| |
|
| Other contracts sold |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
PART II
Item 8
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
|
|
| Derivative |
| Derivative |
| Derivative |
| Derivative |
| |||||||
| (In millions) |
| Assets |
| Liabilities |
| Assets |
| Liabilities |
| |||||||
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2022 |
| June 30, 2021 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Interest rate contracts |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Other contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross amounts of derivatives |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Gross amounts of derivatives offset in the balance sheet |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
| Cash collateral received |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amounts of derivatives |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Short-term investments |
| $ | |
|
| $ | 0 |
|
| $ | |
|
| $ | 0 |
|
| Other current assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other long-term assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other current liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
| Other long-term liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $
The following table presents the fair value of our derivatives instruments on a gross basis:
| (In millions) |
| Level 1 |
|
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
PART II
Item 8
Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Designated as Fair Value Hedging Instruments |
|
|
| |||||||||
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
| |||||||||
| Derivatives |
| $ | |
|
| $ | |
|
| $ | |
|
| Hedged items |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Excluded from effectiveness assessment |
|
| |
|
|
| |
|
|
| |
|
| Interest rate contracts |
|
|
| |||||||||
| Derivatives |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Hedged items |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Cash Flow Hedging Instruments |
|
|
| |||||||||
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
| |||||||||
| Amount reclassified from accumulated other comprehensive income |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| |
|
|
| ( | ) |
| Other contracts |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| Included in effectiveness assessment |
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
NOTE 6 — INVENTORIES
The components of inventories were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Raw materials |
| $ | |
|
| $ | |
|
| Work in process |
|
| |
|
|
| |
|
| Finished goods |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
76
PART II
Item 8
NOTE 7 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Land |
| $ | |
|
| $ | |
|
| Buildings and improvements |
|
| |
|
|
| |
|
| Leasehold improvements |
|
| |
|
|
| |
|
| Computer equipment and software |
|
| |
|
|
| |
|
| Furniture and equipment |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, at cost |
|
| |
|
|
| |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
During fiscal years 2022, 2021, and 2020, depreciation expense was $
NOTE 8 — BUSINESS COMBINATIONS
Nuance Communications, Inc.
On
The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.
The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:
| (In millions) |
|
|
|
| ||||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Goodwill (a) |
|
| $ | |
| |||
| Intangible assets |
|
|
| |
| |||
| Other assets |
|
|
| |
| |||
| Other liabilities (b) |
|
|
| ( | ) | |||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
|
| $ | |
| |||
|
|
|
|
|
|
|
|
|
|
| (a) | |
| (b) | |
77
PART II
Item 8
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions, except average life) |
| Amount |
|
| Weighted Average Life |
| |||
|
|
|
| |||||||
|
|
|
| |||||||
| Customer-related |
| $ | |
|
| |
| ||
| Technology-based |
|
| |
|
| |
| ||
| Marketing-related |
|
| |
|
| |
| ||
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
| ||||
| Total |
| $ | |
|
| |
| ||
|
|
|
|
|
|
|
|
|
| |
ZeniMax Media Inc.
On
The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:
| (In millions) |
|
|
|
| ||||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Cash and cash equivalents |
|
| $ | |
| |||
| Goodwill |
|
|
| |
| |||
| Intangible assets |
|
|
| |
| |||
| Other assets |
|
|
| |
| |||
| Other liabilities |
|
|
| ( | ) | |||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
|
| $ | |
| |||
|
|
|
|
|
|
|
|
|
|
Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.
Following are details of the purchase price allocated to the intangible assets acquired:
| (In millions, except average life) |
| Amount |
|
| Weighted Average Life |
| |||
|
|
|
| |||||||
|
|
|
| |||||||
| Technology-based |
| $ | |
|
| |
| ||
| Marketing-related |
|
| |
|
| |
| ||
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
| ||||
| Total |
| $ | |
|
| |
| ||
|
|
|
|
|
|
|
|
|
| |
Activision Blizzard, Inc.
On
78
PART II
Item 8
NOTE 9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) |
|
| June 30, 2020 |
|
|
| Acquisitions |
|
|
| Other |
|
|
| June 30, 2021 |
|
|
| Acquisitions |
|
|
| Other |
|
|
|
| June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| | (b) |
|
| |
| (b) |
|
| |
|
| More Personal Computing |
|
| |
|
|
| | (a) |
|
| | (a) |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
| (b) | |
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
NOTE 10 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
| (In millions) |
| Gross |
|
| Accumulated |
|
| Net Carrying |
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, |
|
|
|
|
|
|
| 2022 |
|
|
|
|
|
|
|
| 2021 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Technology-based |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| Customer-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Marketing-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Contract-based |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | | (a) |
| $ | ( | ) |
| $ | |
|
| $ | | (b) |
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes intangible assets of $ |
| (b) | |
No material impairments of intangible assets were identified during fiscal years 2022, 2021, or 2020. We estimate that we have no significant residual value related to our intangible assets.
79
PART II
Item 8
The components of intangible assets acquired during the periods presented were as follows:
| (In millions) |
| Amount |
|
| Weighted Average Life |
|
| Amount |
|
| Weighted Average Life |
| ||||
|
|
| |||||||||||||||
|
|
|
|
|
|
| |||||||||||
| Year Ended June 30, |
| 2022 |
|
|
|
|
| 2021 |
|
|
|
| ||||
|
|
|
|
|
| ||||||||||||
| Technology-based |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| Customer-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Marketing-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Contract-based |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2022:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2023 |
| $ | |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| 2026 |
|
| |
|
| 2027 |
|
| |
|
| Thereafter |
|
| |
|
|
|
| |||
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
80
PART II
Item 8
NOTE 11 — DEBT
The components of debt were as follows:
| (In millions, issuance by calendar year) |
| Maturities (calendar year) |
| Stated Interest Rate |
|
| Effective Interest Rate |
| June 30, 2022 |
|
| June 30, 2021 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Total face value |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Unamortized discount and issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
| Hedge fair value adjustments (b) |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| |
| ||||||
| Premium on debt exchange (a) |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Total debt |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| (a) | |
| (b) | |
As of June 30, 2022 and 2021, the estimated fair value of long-term debt, including the current portion, was $
Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2022, 2021, and 2020 was $
The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2022:
| (In millions) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ending June 30, |
|
|
|
|
|
|
|
|
|
|
| 2023 |
| $ | |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| 2026 |
|
| |
|
| 2027 |
|
| |
|
| Thereafter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
81
PART II
Item 8
NOTE 12 — INCOME TAXES
Provision for Income Taxes
The components of the provision for income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | |
|
| $ | |
|
| $ | |
|
| U.S. state and local |
|
| |
|
|
| |
|
|
| |
|
| Foreign |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | ( | ) |
| $ | |
|
| $ | |
|
| U.S. state and local |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Foreign |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred taxes |
| $ | ( | ) |
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| U.S. |
| $ | |
|
| $ | |
|
| $ | |
|
| Foreign |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Federal statutory rate |
|
| | % |
|
| | % |
|
| | % |
| Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign earnings taxed at lower rates |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| Impact of intangible property transfers |
|
| ( | % |
|
| | % |
|
| | % |
| Foreign-derived intangible income deduction |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| State income taxes, net of federal benefit |
|
| | % |
|
| | % |
|
| | % |
| Research and development credit |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| Excess tax benefits relating to stock-based compensation |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| Interest, net |
|
| | % |
|
| | % |
|
| | % |
| Other reconciling items, net |
|
| ( | % |
|
| ( | % |
|
| | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effective rate |
|
| | % |
|
| | % |
|
| | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $
82
PART II
Item 8
We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $
The decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. In fiscal years 2022, 2021, and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated
The decrease in our effective tax rate for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $
83
PART II
Item 8
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| Accruals, reserves, and other expenses |
|
| |
|
|
| |
|
| Loss and credit carryforwards |
|
| |
|
|
| |
|
| Amortization |
|
| |
|
|
| |
|
| Leasing liabilities |
|
| |
|
|
| |
|
| Unearned revenue |
|
| |
|
|
| |
|
| Other |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax assets |
|
| |
|
|
| |
|
| Less valuation allowance |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax assets, net of valuation allowance |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Book/tax basis differences in investments and debt |
| $ | ( | ) |
| $ | ( | ) |
| Leasing assets |
|
| ( | ) |
|
| ( | ) |
| Depreciation |
|
| ( | ) |
|
| ( | ) |
| Deferred tax on foreign earnings |
|
| ( | ) |
|
| ( | ) |
| Other |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax liabilities |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Reported As |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Other long-term assets |
| $ | |
|
| $ | |
|
| Long-term deferred income tax liabilities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
As of June 30, 2022, we had federal, state, and foreign net operating loss carryforwards of $
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized.
Income taxes paid, net of refunds, were $
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2022, 2021, and 2020, were $
84
PART II
Item 8
As of June 30, 2022, 2021, and 2020, we had accrued interest expense related to uncertain tax positions of $
The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Beginning unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
| Decreases related to settlements |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Increases for tax positions related to the current year |
|
| |
|
|
| |
|
|
| |
|
| Increases for tax positions related to prior years |
|
| |
|
|
| |
|
|
| |
|
| Decreases for tax positions related to prior years |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Decreases due to lapsed statutes of limitations |
|
| |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years
As of June 30, 2022, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years
NOTE 13 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Changes in unearned revenue were as follows:
| (In millions) |
|
|
|
| |
|
|
| ||||
|
|
|
|
|
| |
| Year Ended June 30, 2022 |
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
|
| $ | |
|
| Deferral of revenue |
|
|
| |
|
| Recognition of unearned revenue |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
|
| $ | |
|
|
|
|
|
|
|
|
85
PART II
Item 8
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $
NOTE 14 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of
The components of lease expense were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Operating lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization of right-of-use assets |
| $ | |
|
| $ | |
|
| $ | |
|
| Interest on lease liabilities |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating cash flows from operating leases |
| $ | |
|
| $ | |
|
| $ | |
|
| Operating cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
| Financing cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
PART II
Item 8
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating lease right-of-use assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Operating lease liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, at cost |
| $ | |
|
| $ | |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
The following table outlines maturities of our lease liabilities as of June 30, 2022:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Year Ending June 30, |
| Operating Leases |
|
| Finance Leases |
| ||
|
|
|
| ||||||
| 2023 |
| $ | |
|
| $ | |
|
| 2024 |
|
| |
|
|
| |
|
| 2025 |
|
| |
|
|
| |
|
| 2026 |
|
| |
|
|
| |
|
| 2027 |
|
| |
|
|
| |
|
| Thereafter |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease payments |
|
| |
|
|
| |
|
| Less imputed interest |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2022, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $
87
PART II
Item 8
NOTE 15 — CONTINGENCIES
Antitrust Litigation and Claims
China State Administration for Market Regulation Investigation
In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.
In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for September of 2022.
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2022, we accrued aggregate legal liabilities of $
88
PART II
Item 8
NOTE 16 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Balance, beginning of year |
|
| |
|
|
| |
|
|
| |
|
| Issued |
|
| |
|
|
| |
|
|
| |
|
| Repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of year |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $
On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $
On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $
We repurchased the following shares of common stock under the share repurchase programs:
| (In millions) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Year Ended June 30, |
|
2022 |
|
|
2021 |
|
|
2020 |
| |||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| First Quarter |
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
| Second Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Third Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Fourth Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All repurchases were made using cash resources. Shares repurchased during the fourth and third quarters of fiscal year 2022 were under the share repurchase program approved on September 14, 2021. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on both September 14, 2021 and September 18, 2019. Shares repurchased during the first quarter of fiscal year 2022, fiscal year 2021, and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $
89
PART II
Item 8
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Record Date |
|
| Payment Date |
| Dividend Per Share |
|
| Amount |
| ||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
| Fiscal Year 2022 |
|
|
|
|
|
|
|
| (In millions) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
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|
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|
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|
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|
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|
|
|
|
|
|
|
| Fiscal Year 2021 |
|
|
|
|
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|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
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| |
|
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| |
|
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| |
|
| |
|
| |
|
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| |
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| |
|
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| |
|
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|
|
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|
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| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
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|
The dividend declared on June 14, 2022 was included in other current liabilities as of June 30, 2022.
90
PART II
Item 8
NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| (In millions) |
|
|
|
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|
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|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | |
|
| Unrealized gains (losses), net of tax of $( |
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Reclassification adjustments for (gains) losses included in other income (expense), net |
|
| |
|
|
| ( | ) |
|
| |
|
| Tax expense (benefit) included in provision for income taxes |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives, net of tax of $ |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Unrealized gains (losses), net of tax of $( |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Reclassification adjustments for (gains) losses included in other income (expense), net |
|
| |
|
|
| ( | ) |
|
| |
|
| Tax expense (benefit) included in provision for income taxes |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net change related to investments, net of tax of $( |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Cumulative effect of accounting changes |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | ( | ) |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| Translation adjustments and other, net of tax of $ |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss), end of period |
| $ | ( | ) |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.
Stock-based compensation expense and related income tax benefits were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| $ | |
|
| Income tax benefits related to stock-based compensation |
|
| |
|
|
| |
|
|
| |
|
|
|
| |||||||||||
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of
91
PART II
Item 8
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| Year ended June 30, |
|
|
|
| 2022 |
|
|
|
|
| 2021 |
|
|
|
|
| 2020 |
| |
|
|
|
|
|
|
| ||||||||||||||
| Dividends per share (quarterly amounts) |
| $ | | – | |
| $ |
| | – | |
|
| $ | | – | |
| |
| Interest rates |
|
| | – | |
|
|
| | – | |
|
|
| | – | |
| |
|
|
|
|
| ||||||||||||||||
During fiscal year 2022, the following activity occurred under our stock plans:
| Shares |
|
| Weighted Average Grant-Date Fair Value |
| ||||
|
|
| |||||||
|
|
| |||||||
| (In millions) |
|
|
|
| ||||
|
| ||||||||
| Stock Awards |
| |||||||
|
|
|
| ||||||
| Nonvested balance, beginning of year |
|
| |
|
| $ | |
|
| Granted (a) |
|
| |
|
|
| |
|
| Vested |
|
| ( | ) |
|
| |
|
| Forfeited |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nonvested balance, end of year |
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
As of June 30, 2022, there was approximately $
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at
| (Shares in millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Shares purchased |
|
| |
|
|
| |
|
|
| |
|
| Average price per share |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
| |||||||||||
As of June 30, 2022,
92
PART II
Item 8
Savings Plans
We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $
NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
|
| • | Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Microsoft Viva. |
|
| • | Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services. |
|
| • | LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions. |
|
| • | Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications. |
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:
|
| • | Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub. |
|
| • | Enterprise Services, including Enterprise Support Services, Microsoft Consulting Services, and Nuance professional services. |
More Personal Computing
Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:
|
| • | Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. |
|
| • | Devices, including Surface and PC accessories. |
|
| • | Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, third-party disc royalties, advertising, and other cloud services. |
|
| • | Search and news advertising. |
93
PART II
Item 8
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated.
Segment revenue and operating income were as follows during the periods presented:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| United States (a) |
| $ | |
|
| $ | |
|
| $ | |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue. |
94
PART II
Item 8
Revenue, classified by significant product and service offerings, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Server products and cloud services |
| $ | |
|
| $ | |
|
| $ | |
|
| Office products and cloud services |
|
| |
|
|
| |
|
|
| |
|
| Windows |
|
| |
|
|
| |
|
|
| |
|
| Gaming |
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
| Search and news advertising |
|
| |
|
|
| |
|
|
| |
|
| Enterprise Services |
|
| |
|
|
| |
|
|
| |
|
| Devices |
|
| |
|
|
| |
|
|
| |
|
| Other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have recast certain previously reported amounts in the table above to conform to the way we internally manage and monitor our business.
Our Microsoft Cloud (formerly commercial cloud) revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| United States |
| $ | |
|
| $ | |
|
| $ | |
|
| Ireland |
|
| |
|
|
| |
|
|
| |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
PART II
Item 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 28, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
96
PART II
Item 8
Revenue Recognition – Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
|
| • | Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. |
|
|
| • | The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. |
|
|
| • | Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). |
|
|
| • | Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. |
|
Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:
|
| • | We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. |
|
|
| • | We evaluated management's significant accounting policies related to these customer agreements for reasonableness. |
|
|
| • | We selected a sample of customer agreements and performed the following procedures: |
|
|
| - | Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. |
|
|
| - | Tested management's identification and treatment of contract terms. |
|
|
| - | Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
|
|
| • | We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. |
|
|
| • | We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. |
|
97
PART II
Item 8
Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements
Critical Audit Matter Description
The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements.
Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:
|
| • | We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. |
|
|
| • | We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. |
|
|
| • | We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. |
|
|
| • | For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. |
|
|
| • | We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments. |
|
/s/
July 28, 2022
We have served as the Company's auditor since 1983.
98
PART II
Item 9, 9A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
| (In millions, except per share amounts) |
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| Year Ended June 30, |
| 2021 |
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| 2020 |
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| 2019 |
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| |||||||||
| Revenue: |
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| Product |
| $ | |
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| $ | |
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| $ | |
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| Service and other |
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| Total revenue |
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| Cost of revenue: |
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| Product |
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| Service and other |
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| Total cost of revenue |
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| Gross margin |
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| Research and development |
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| Sales and marketing |
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| General and administrative |
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| Operating income |
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| Other income, net |
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| Income before income taxes |
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| Provision for income taxes |
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| Net income |
| $ | |
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| $ | |
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| $ | |
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| |||||||||
| Earnings per share: |
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| Basic |
| $ | |
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| $ | |
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| $ | |
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| Diluted |
| $ | |
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| $ | |
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| $ | |
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| |||||||||
| Weighted average shares outstanding: |
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| Basic |
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| Diluted |
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Refer to accompanying notes.
57
PART II
Item 8
COMPREHENSIVE INCOME STATEMENTS
| (In millions) |
|
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| |||
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| |||||||||||
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| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
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| |||||||||
| Net income |
| $ | |
|
| $ | |
|
| $ | |
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| Other comprehensive income (loss), net of tax: |
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| Net change related to derivatives |
|
| |
|
|
| ( | ) |
|
| ( | ) |
| Net change related to investments |
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| ( | ) |
|
| |
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| |
|
| Translation adjustments and other |
|
| |
|
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| ( | ) |
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| ( | ) |
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| |||
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| Other comprehensive income (loss) |
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| ( | ) |
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| |
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| |||
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| Comprehensive income |
| $ | |
|
| $ | |
|
| $ | |
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|
Refer to accompanying notes.
58
PART II
Item 8
BALANCE SHEETS
| (In millions) |
|
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| ||
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| |||||||
|
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| |||||
| June 30, |
| 2021 |
|
| 2020 |
| ||
|
|
|
| ||||||
| Assets |
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|
|
| Current assets: |
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|
| Cash and cash equivalents |
| $ | |
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| $ | |
|
| Short-term investments |
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| |
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| |
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| |||
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| Total cash, cash equivalents, and short-term investments |
|
| |
|
|
| |
|
| Accounts receivable, net of allowance for doubtful accounts of $ |
|
| |
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| |
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| Inventories |
|
| |
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| |
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| Other current assets |
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| |
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| |
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| |||
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| |||
| Total current assets |
|
| |
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| |
|
| Property and equipment, net of accumulated depreciation of $ |
|
| |
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| |
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| Operating lease right-of-use assets |
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| |
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| |
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| Equity investments |
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| |
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| |
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| Goodwill |
|
| |
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| |
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| Intangible assets, net |
|
| |
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| |
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| Other long-term assets |
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| |
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|
| |
|
|
|
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|
| |||
|
|
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|
| |||
| Total assets |
| $ | |
|
| $ | |
|
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|
|
| Liabilities and stockholders’ equity |
|
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|
|
| Current liabilities: |
|
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|
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|
|
| Accounts payable |
| $ | |
|
| $ | |
|
| Current portion of long-term debt |
|
| |
|
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| |
|
| Accrued compensation |
|
| |
|
|
| |
|
| Short-term income taxes |
|
| |
|
|
| |
|
| Short-term unearned revenue |
|
| |
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| |
|
| Other current liabilities |
|
| |
|
|
| |
|
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|
| |||
|
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|
| |||
| Total current liabilities |
|
| |
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|
| |
|
| Long-term debt |
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| |
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|
| |
|
| Long-term income taxes |
|
| |
|
|
| |
|
| Long-term unearned revenue |
|
| |
|
|
| |
|
| Deferred income taxes |
|
| |
|
|
| |
|
| Operating lease liabilities |
|
| |
|
|
| |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Commitments and contingencies |
|
| |
|
|
| |
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock and paid-in capital – shares authorized |
|
| |
|
|
| |
|
| Retained earnings |
|
| |
|
|
| |
|
| Accumulated other comprehensive income |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities and stockholders’ equity |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
59
PART II
Item 8
CASH FLOWS STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
| |||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Operations |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
| $ | |
|
| $ | |
|
| $ | |
|
| Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation, amortization, and other |
|
| |
|
|
| |
|
|
| |
|
| Stock-based compensation expense |
|
| |
|
|
| |
|
|
| |
|
| Net recognized gains on investments and derivatives |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Deferred income taxes |
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Inventories |
|
| ( | ) |
|
| |
|
|
| |
|
| Other current assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Other long-term assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Accounts payable |
|
| |
|
|
| |
|
|
| |
|
| Unearned revenue |
|
| |
|
|
| |
|
|
| |
|
| Income taxes |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Other current liabilities |
|
| |
|
|
| |
|
|
| |
|
| Other long-term liabilities |
|
| |
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| |
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| |
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|
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|
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|
| |||
|
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|
|
| Net cash from operations |
|
| |
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| |
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| |
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|
|
|
|
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| |||
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|
|
| Financing |
|
|
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|
|
| Cash premium on debt exchange |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Repayments of debt |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock issued |
|
| |
|
|
| |
|
|
| |
|
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock cash dividends paid |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Other, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
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|
|
|
|
|
|
|
|
|
|
|
| Net cash used in financing |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investing |
|
|
|
|
|
|
|
|
|
|
|
|
| Additions to property and equipment |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Acquisition of companies, net of cash acquired, and purchases of intangible and other assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Purchases of investments |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Maturities of investments |
|
| |
|
|
| |
|
|
| |
|
| Sales of investments |
|
| |
|
|
| |
|
|
| |
|
| Other, net |
|
| ( | ) |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of foreign exchange rates on cash and cash equivalents |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in cash and cash equivalents |
|
| |
|
|
| |
|
|
| ( | ) |
| Cash and cash equivalents, beginning of period |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
60
PART II
Item 8
STOCKHOLDERS’ EQUITY STATEMENTS
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Common stock and paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Common stock issued |
|
| |
|
|
| |
|
|
| |
|
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Stock-based compensation expense |
|
| |
|
|
| |
|
|
| |
|
| Other, net |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| |
|
|
| |
|
|
| |
|
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|
|
|
|
|
|
|
| |||
|
|
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|
|
|
|
|
|
|
| |||
| Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
|
| |
|
|
| |
|
|
| |
|
| Net income |
|
| |
|
|
| |
|
|
| |
|
| Common stock cash dividends |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Cumulative effect of accounting changes |
|
| ( | ) |
|
| |
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| |
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| |||
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| |||
| Balance, end of period |
|
| |
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| |
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| |
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| |||
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| |||
| Accumulated other comprehensive income (loss) |
|
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| Balance, beginning of period |
|
| |
|
|
| ( | ) |
|
| ( | ) |
| Other comprehensive income (loss) |
|
| ( | ) |
|
| |
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| |
|
| Cumulative effect of accounting changes |
|
| |
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| |
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| ( | ) |
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| |||
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| |||
| Balance, end of period |
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| |
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| |
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| ( | ) |
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| |||
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| |||
| Total stockholders’ equity |
| $ | |
|
| $ | |
|
| $ | |
|
|
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|
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|
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|
|
|
| Cash dividends declared per common share |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
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|
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|
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|
Refer to accompanying notes.
61
PART II
Item 8
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.
In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
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PART II
Item 8
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.
Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
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PART II
Item 8
Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Contract Balances and Other Receivables
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows 10 post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
As of June 30, 2021 and 2020, other receivables due from suppliers were $
As of June 30, 2021 and 2020, long-term accounts receivable, net of allowance for doubtful accounts, was $
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
64
PART II
Item 8
Activity in the allowance for doubtful accounts was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended June 30, |
|
| 2021 |
|
|
| 2020 |
|
|
| 2019 |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Charged to costs and other |
|
| |
|
|
| |
|
|
| |
|
| Write-offs |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
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|
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|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts included in our consolidated balance sheets:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
| June 30, |
|
| 2021 |
|
|
| 2020 |
|
|
| 2019 |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Accounts receivable, net of allowance for doubtful accounts |
| $ | |
|
| $ | |
|
| $ | |
|
| Other long-term assets |
|
| |
|
|
| |
|
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| |
|
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|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
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| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2021 and 2020, our financing receivables, net were $
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
65
PART II
Item 8
Research and Development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
66
PART II
Item 8
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
Derivatives
Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in earnings with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings.
For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
| • | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. |
|
| • | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts. |
67
PART II
Item 8
|
| • | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. |
We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use,
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
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PART II
Item 8
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted the standard effective July 1, 2020. We use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. The adoption of the standard did not have a material impact on our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
Accounting for Income Taxes
In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021. We have completed our assessment and concluded that adoption of the new standard will not have a material impact on our consolidated financial statements.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as follows:
| (In millions, except earnings per share) |
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| |||
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| |||
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| |||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
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|
|
|
|
|
|
| Net income available for common shareholders (A) |
| $ | |
|
| $ | |
|
| $ | |
|
| Weighted average outstanding shares of common stock (B) |
|
| |
|
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| |
|
|
| |
|
| Dilutive effect of stock-based awards |
|
| |
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| |
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| |
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| Common stock and common stock equivalents (C) |
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| |
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| Earnings Per Share |
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|
| Basic (A/B) |
| $ | |
|
| $ | |
|
| $ | |
|
| Diluted (A/C) |
| $ | |
|
| $ | |
|
| $ | |
|
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Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
69
PART II
Item 8
NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
| (In millions) |
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| |||
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| |||||||||||
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| |||||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Interest and dividends income |
| $ | |
|
| $ | |
|
| $ | |
|
| Interest expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Net recognized gains on investments |
|
| |
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| |
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| |
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| Net gains on derivatives |
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| |
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| |
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| |
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| Net gains (losses) on foreign currency remeasurements |
|
| |
|
|
| ( | ) |
|
| ( | ) |
| Other, net |
|
| |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Realized gains from sales of available-for-sale securities |
| $ | |
|
| $ | |
|
| $ | |
|
| Realized losses from sales of available-for-sale securities |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Impairments and allowance for credit losses |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains (losses) on equity investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Net realized gains on investments sold |
| $ | |
|
| $ | |
|
| $ | |
|
| Net unrealized gains on investments still held |
|
| |
|
|
| |
|
|
| |
|
| Impairments of investments |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
PART II
Item 8
NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
| (In millions) |
| Fair Value Level |
|
| Adjusted Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
PART II
Item 8
| (In millions) |
| Fair Value Level |
|
| Adjusted Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2021 and 2020, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized |
|
| Fair Value |
|
| Unrealized |
|
| Total |
|
| ||||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Municipal securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
PART II
Item 8
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
|
| Total Unrealized Losses |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Total Fair Value |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
| Municipal securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.
Debt Investment Maturities
| (In millions) |
| Adjusted Cost Basis |
|
| Estimated Fair Value |
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Due in one year or less |
| $ | |
|
| $ | |
|
| Due after one year through five years |
|
| |
|
|
| |
|
| Due after five years through 10 years |
|
| |
|
|
| |
|
| Due after 10 years |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currencies
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.
Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Interest Rate
Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.
73
PART II
Item 8
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
| (In millions) |
| June 30, 2021 |
|
| June 30, 2020 |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
| $ | |
|
| $ | |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Interest rate contracts purchased |
|
| |
|
|
| |
|
|
|
|
| ||||||
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
|
| |
|
|
| |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Other contracts purchased |
|
| |
|
|
| |
|
| Other contracts sold |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
PART II
Item 8
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
|
|
| Derivative |
| Derivative |
| Derivative |
| Derivative |
| |||||||
| (In millions) |
| Assets |
| Liabilities |
| Assets |
| Liabilities |
| |||||||
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
| June 30, 2020 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Interest rate contracts |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Other contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross amounts of derivatives |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Gross amounts of derivatives offset in the balance sheet |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
| Cash collateral received |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amounts of derivatives |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Short-term investments |
| $ | |
|
| $ | 0 |
|
| $ | |
|
| $ | 0 |
|
| Other current assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other long-term assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other current liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
| Other long-term liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $
The following table presents the fair value of our derivatives instruments on a gross basis:
| (In millions) |
| Level 1 |
|
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
PART II
Item 8
Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:
| (In millions) |
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Year Ended June 30, |
| 2021 |
| 2020 | 2019 |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Revenue |
|
| Other (Expense), |
|
| Revenue |
|
| Other (Expense), |
|
| Revenue |
|
| Other Income (Expense), Net |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Fair Value Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| Hedged items |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Excluded from effectiveness assessment |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Hedged items |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount reclassified from accumulated other comprehensive income |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Excluded from effectiveness assessment |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Other contracts |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| Included in effectiveness assessment |
| $ | |
|
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
NOTE 6 — INVENTORIES
The components of inventories were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2021 |
|
| 2020 |
| ||
|
|
|
| ||||||
| Raw materials |
| $ | |
|
| $ | |
|
| Work in process |
|
| |
|
|
| |
|
| Finished goods |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
76
PART II
Item 8
NOTE 7 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2021 |
|
| 2020 |
| ||
|
|
|
| ||||||
| Land |
| $ | |
|
| $ | |
|
| Buildings and improvements |
|
| |
|
|
| |
|
| Leasehold improvements |
|
| |
|
|
| |
|
| Computer equipment and software |
|
| |
|
|
| |
|
| Furniture and equipment |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, at cost |
|
| |
|
|
| |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
During fiscal years 2021, 2020, and 2019, depreciation expense was $
During fiscal year 2020, we recorded an impairment charge of $
NOTE 8 — BUSINESS COMBINATIONS
ZeniMax Media Inc.
On
The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.
The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:
| (In millions) |
| |||
|
|
|
| ||
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | |
|
| Goodwill |
|
| |
|
| Intangible assets |
|
| |
|
| Other assets |
|
| |
|
| Other liabilities |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.
77
PART II
Item 8
Following are details of the purchase price allocated to the intangible assets acquired:
| (In millions) |
| Amount |
|
| Weighted Average Life |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Technology-based |
| $ | |
|
|
| |
|
| Marketing-related |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
GitHub, Inc.
On
The allocation of the purchase price to goodwill was completed as of June 30, 2019.
| (In millions) |
| |||
|
|
|
| ||
|
|
|
|
|
|
| Cash, cash equivalents, and short-term investments |
| $ | |
|
| Goodwill |
|
| |
|
| Intangible assets |
|
| |
|
| Other assets |
|
| |
|
| Other liabilities |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions) |
| Amount |
|
| Weighted Average Life |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Customer-related |
| $ | |
|
|
| |
|
| Technology-based |
|
| |
|
|
| |
|
| Marketing-related |
|
| |
|
|
| |
|
| Contract-based |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Transactions recognized separately from the purchase price allocation were approximately $
Nuance Communications, Inc.
On
78
PART II
Item 8
NOTE 9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) |
|
| June 30, 2019 |
|
|
| Acquisitions |
|
|
| Other |
|
|
| June 30, 2020 |
|
|
| Acquisitions |
|
|
| Other |
|
|
| June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| | (a) |
|
| | (a) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
NOTE 10 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
| (In millions) |
| Gross |
|
| Accumulated |
|
| Net Carrying |
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, |
|
|
|
|
|
|
| 2021 |
|
|
|
|
|
|
|
| 2020 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Technology-based |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| Customer-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Marketing-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Contract-based |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | | (a) |
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
No material impairments of intangible assets were identified during fiscal years 2021, 2020, or 2019. We estimate that we have no significant residual value related to our intangible assets.
79
PART II
Item 8
The components of intangible assets acquired during the periods presented were as follows:
| (In millions) |
| Amount |
|
| Weighted Average Life |
|
| Amount |
|
| Weighted Average Life |
| ||||
|
|
| |||||||||||||||
|
|
|
|
|
|
| |||||||||||
| Year Ended June 30, |
| 2021 |
|
|
|
|
| 2020 |
|
|
|
| ||||
|
|
|
|
|
| ||||||||||||
| Technology-based |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| Customer-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Marketing-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Contract-based |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2021:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2022 |
| $ | |
|
| 2023 |
|
| |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| 2026 |
|
| |
|
| Thereafter |
|
| |
|
|
|
| |||
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
80
PART II
Item 8
NOTE 11 — DEBT
The components of debt were as follows:
| (In millions, issuance by calendar year) |
| Maturities (calendar year) |
| Stated Interest Rate |
|
| Effective Interest Rate |
| June 30, 2021 |
|
| June 30, 2020 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
| ||
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Total face value |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Unamortized discount and issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
| Hedge fair value adjustments (b) |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Premium on debt exchange (a) |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Total debt |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| (a) | |
| (b) | |
As of June 30, 2021 and 2020, the estimated fair value of long-term debt, including the current portion, was $
Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2021, 2020, and 2019 was $
The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2021:
| (In millions) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ending June 30, |
|
|
|
|
|
|
|
|
|
|
| 2022 |
| $ | |
|
| 2023 |
|
| |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| 2026 |
|
| |
|
| Thereafter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
81
PART II
Item 8
NOTE 12 — INCOME TAXES
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge of $
In fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $
Provision for Income Taxes
The components of the provision for income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | |
|
| $ | |
|
| $ | |
|
| U.S. state and local |
|
| |
|
|
| |
|
|
| |
|
| Foreign |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| U.S. state and local |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Foreign |
|
| |
|
|
| ( | ) |
|
| |
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| Deferred taxes |
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
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|
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|
| Provision for income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
| (In millions) |
| |||||||||||
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| |||
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| |||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
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|
| |||||||||
| U.S. |
| $ | |
|
| $ | |
|
| $ | |
|
| Foreign |
|
| |
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| |
|
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| |
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|
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|
|
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|
|
|
|
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|
| Income before income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
82
PART II
Item 8
Effective Tax Rate
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
|
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| |||
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| |||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
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| |||||||||
| Federal statutory rate |
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| |
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| |
|
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| |
|
| Effect of: |
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|
| Foreign earnings taxed at lower rates |
|
| ( |
|
|
| ( |
|
|
| ( |
|
| Impact of the enactment of the TCJA |
|
| |
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| |
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| |
|
| Impact of intangible property transfers |
|
| |
|
|
| |
|
|
| ( |
|
| Foreign-derived intangible income deduction |
|
| ( |
|
|
| ( |
|
|
| ( |
|
| State income taxes, net of federal benefit |
|
| |
|
|
| |
|
|
| |
|
| Research and development credit |
|
| ( |
|
|
| ( |
|
|
| ( |
|
| Excess tax benefits relating to stock-based compensation |
|
| ( |
|
|
| ( |
|
|
| ( |
|
| Interest, net |
|
| |
|
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| |
|
|
| |
|
| Other reconciling items, net |
|
| ( |
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| |
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| |
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| Effective rate |
|
| |
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| |
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| |
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We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $
The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $
83
PART II
Item 8
The decrease in our effective tax rate for fiscal year 2021 compared to fiscal year 2020 was primarily due to tax benefits from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, final TCJA regulations, and an increase in tax benefits relating to stock-based compensation. The increase in our effective tax rate for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| June 30, |
| 2021 |
|
| 2020 |
| ||
|
|
|
| ||||||
| Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| Accruals, reserves, and other expenses |
|
| |
|
|
| |
|
| Loss and credit carryforwards |
|
| |
|
|
| |
|
| Amortization |
|
| |
|
|
| |
|
| Leasing liabilities |
|
| |
|
|
| |
|
| Unearned revenue |
|
| |
|
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| |
|
| Other |
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| |
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| |
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|
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|
|
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|
|
|
|
|
|
| Deferred income tax assets |
|
| |
|
|
| |
|
| Less valuation allowance |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
| Deferred income tax assets, net of valuation allowance |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Book/tax basis differences in investments and debt |
| $ | ( | ) |
| $ | ( | ) |
| Leasing assets |
|
| ( | ) |
|
| ( | ) |
| Depreciation |
|
| ( | ) |
|
| ( | ) |
| Deferred GILTI tax liabilities |
|
| ( | ) |
|
| ( | ) |
| Other |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax liabilities |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Reported As |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Other long-term assets |
| $ | |
|
| $ | |
|
| Long-term deferred income tax liabilities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
As of June 30, 2021, we had federal, state, and foreign net operating loss carryforwards of $
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized. In fiscal year 2020, we removed $
Income taxes paid, net of refunds, were $
84
PART II
Item 8
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2021, 2020, and 2019, were $
As of June 30, 2021, 2020, and 2019, we had accrued interest expense related to uncertain tax positions of $
The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Beginning unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
| Decreases related to settlements |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Increases for tax positions related to the current year |
|
| |
|
|
| |
|
|
| |
|
| Increases for tax positions related to prior years |
|
| |
|
|
| |
|
|
| |
|
| Decreases for tax positions related to prior years |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Decreases due to lapsed statutes of limitations |
|
| ( | ) |
|
| ( | ) |
|
| |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years
As of June 30, 2021, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years
NOTE 13 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2021 |
|
| 2020 |
| ||
|
|
|
| ||||||
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
85
PART II
Item 8
Changes in unearned revenue were as follows:
| (In millions) |
|
|
|
| |
|
|
| ||||
|
|
|
|
|
| |
| Year Ended June 30, 2021 |
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
|
| $ | |
|
| Deferral of revenue |
|
|
| |
|
| Recognition of unearned revenue |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
|
| $ | |
|
|
|
|
|
|
|
|
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $
NOTE 14 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of
The components of lease expense were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2021 |
|
|
| 2020 |
|
|
| 2019 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Operating lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
| Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization of right-of-use assets |
| $ | |
|
| $ | |
|
| $ | |
|
| Interest on lease liabilities |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2021 |
|
|
| 2020 |
|
|
| 2019 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating cash flows from operating leases |
| $ | |
|
| $ | |
|
| $ | |
|
| Operating cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
| Financing cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
PART II
Item 8
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||
| June 30, |
| 2021 |
|
| 2020 |
| ||
|
|
|
| ||||||
| Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating lease right-of-use assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Operating lease liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, at cost |
| $ | |
|
| $ | |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
The following table outlines maturities of our lease liabilities as of June 30, 2021:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Year Ending June 30, |
| Operating Leases |
|
| Finance Leases |
| ||
|
|
|
| ||||||
| 2022 |
| $ | |
|
| $ | |
|
| 2023 |
|
| |
|
|
| |
|
| 2024 |
|
| |
|
|
| |
|
| 2025 |
|
| |
|
|
| |
|
| 2026 |
|
| |
|
|
| |
|
| Thereafter |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease payments |
|
| |
|
|
| |
|
| Less imputed interest |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $
During fiscal year 2020, we recorded an impairment charge of $
87
PART II
Item 8
NOTE 15 — CONTINGENCIES
Patent and Intellectual Property Claims
There were 63 patent infringement cases pending against Microsoft as of June 30, 2021, none of which are material individually or in aggregate.
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.
The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement and form of notice have been approved by the courts in British Columbia, Ontario, and Quebec. The ten-month claims period commenced on November 23, 2020 and will close on September 23, 2021.
Other Antitrust Litigation and Claims
China State Administration for Market Regulation Investigation
In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.
In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for January and February of 2022.
88
PART II
Item 8
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2021, we accrued aggregate legal liabilities of $
NOTE 16 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
| (In millions) |
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| |||
|
|
| |||||||||||
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| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Balance, beginning of year |
|
| |
|
|
| |
|
|
| |
|
| Issued |
|
| |
|
|
| |
|
|
| |
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| Repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
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|
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|
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|
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| |||
|
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| |||
| Balance, end of year |
|
| |
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| |
|
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| |
|
|
|
|
|
|
|
|
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|
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|
|
Share Repurchases
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $
On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $
89
PART II
Item 8
We repurchased the following shares of common stock under the share repurchase programs:
| (In millions) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
| ||||||
|
|
| |||||||||||||||||||||||
|
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| |||||||||||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||||||||||||||
|
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| ||||||||||||||||||
| First Quarter |
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| |
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| $ | |
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| |
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| $ | |
|
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| |
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| $ | |
|
| Second Quarter |
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| |
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| |
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| |
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| |
|
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| |
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| |
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| Third Quarter |
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| |
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| |
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| |
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| Fourth Quarter |
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| |
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| |
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| |
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| |
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| |
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| |
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| |||
| Total |
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| |
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| $ | |
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| |
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| $ | |
|
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| |
|
| $ | |
|
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|
Shares repurchased during fiscal year 2021 and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Record Date |
|
| Payment Date |
| Dividend Per Share |
|
| Amount |
| ||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
| Fiscal Year 2021 |
|
|
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| (In millions) |
| ||||||
|
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|
|
|
|
|
|
|
|
|
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|
| |
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| |
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| |
|
| $ | |
|
| $ | |
|
| |
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| |
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| |
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| |
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| |
|
| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
|
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| |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
| Fiscal Year 2020 |
|
|
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|
|
|
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|
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|
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| |
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| |
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| |
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| $ | |
|
| $ | |
|
| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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| |
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|
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|
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|
|
|
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|
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|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
The dividend declared on June 16, 2021 was included in other current liabilities as of June 30, 2021.
90
PART II
Item 8
NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | ( | ) |
| $ | |
|
| $ | |
|
| Unrealized gains (losses), net of tax of $ |
|
| |
|
|
| ( | ) |
|
| |
|
| Reclassification adjustments for gains included in earnings |
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Tax expense included in provision for income taxes |
|
| |
|
|
| |
|
|
| |
|
|
|
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|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives, net of tax of $ |
|
| |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| Unrealized gains (losses), net of tax of $( |
|
| ( | ) |
|
| |
|
|
| |
|
| Reclassification adjustments for (gains) losses included in other income (expense), net |
|
| ( | ) |
|
| |
|
|
| |
|
| Tax expense (benefit) included in provision for income taxes |
|
| |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net change related to investments, net of tax of $( |
|
| ( | ) |
|
| |
|
|
| |
|
| Cumulative effect of accounting changes |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| Translation adjustments and other, net of tax effects of $( |
|
| |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss), end of period |
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. As of June 30, 2021, an aggregate of
Stock-based compensation expense and related income tax benefits were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| $ | |
|
| Income tax benefits related to stock-based compensation |
|
| |
|
|
| |
|
|
| |
|
|
|
| |||||||||||
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of
91
PART II
Item 8
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| Year ended June 30, |
|
|
|
| 2021 |
|
|
|
|
| 2020 |
|
|
|
|
| 2019 |
| |
|
|
|
|
|
|
| ||||||||||||||
|
|
|
|
|
|
| ||||||||||||||
|
|
|
|
|
|
| ||||||||||||||
| Dividends per share (quarterly amounts) |
| $ | | – | |
|
| $ | | – | |
|
| $ | | – | |
| |
| Interest rates |
|
| | – | |
|
|
| | – | |
|
|
| | – | |
| |
|
|
|
|
| ||||||||||||||||
|
|
|
|
| ||||||||||||||||
During fiscal year 2021, the following activity occurred under our stock plans:
| Shares |
|
| Weighted Average Grant-Date Fair Value |
| ||||
|
|
| |||||||
|
|
| |||||||
| (In millions) |
|
|
|
| ||||
|
| ||||||||
| Stock Awards |
| |||||||
|
|
|
| ||||||
| Nonvested balance, beginning of year |
|
| |
|
| $ | |
|
| Granted (a) |
|
| |
|
|
| |
|
| Vested |
|
| ( | ) |
|
| |
|
| Forfeited |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nonvested balance, end of year |
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
As of June 30, 2021, there was approximately $
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at
| (Shares in millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Shares purchased |
|
| |
|
|
| |
|
|
| |
|
| Average price per share |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
| |||||||||||
As of June 30, 2021,
92
PART II
Item 8
Savings Plan
We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute
NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
|
| • | Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business. |
|
| • | Office Consumer, including Microsoft 365 Consumer subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive. |
|
| • | LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions. |
|
| • | Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications. |
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:
|
| • | Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and GitHub. |
|
| • | Enterprise Services, including Premier Support Services and Microsoft Consulting Services. |
More Personal Computing
Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:
|
| • | Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things; and MSN advertising. |
|
| • | Devices, including Surface and PC accessories. |
93
PART II
Item 8
|
| • | Gaming, including Xbox hardware and Xbox content and services, comprising digital transactions, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, and advertising. |
|
| • | Search advertising. |
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments.
Segment revenue and operating income were as follows during the periods presented:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2021 |
|
|
| 2020 |
|
|
| 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| United States (a) |
| $ | |
|
| $ | |
|
| $ | |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue. |
94
PART II
Item 8
Revenue from external customers, classified by significant product and service offerings, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| Server products and cloud services |
| $ | |
|
| $ | |
|
| $ | |
|
| Office products and cloud services |
|
| |
|
|
| |
|
|
| |
|
| Windows |
|
| |
|
|
| |
|
|
| |
|
| Gaming |
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
| Search advertising |
|
| |
|
|
| |
|
|
| |
|
| Enterprise Services |
|
| |
|
|
| |
|
|
| |
|
| Devices |
|
| |
|
|
| |
|
|
| |
|
| Other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our commercial cloud revenue, which includes Azure, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
|
|
|
| |||||||||
| United States |
| $ | |
|
| $ | |
|
| $ | |
|
| Ireland |
|
| |
|
|
| |
|
|
| |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
PART II
Item 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 29, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
96
PART II
Item 8
Revenue Recognition – Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
|
| • | Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. |
|
|
| • | The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. |
|
|
| • | Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). |
|
|
| • | Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. |
|
Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:
|
| • | We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. |
|
|
| • | We evaluated management's significant accounting policies related to these customer agreements for reasonableness. |
|
|
| • | We selected a sample of customer agreements and performed the following procedures: |
|
|
| - | Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. |
|
|
| - | Tested management's identification and treatment of contract terms. |
|
|
| - | Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
|
|
| • | We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. |
|
|
| • | We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. |
|
97
PART II
Item 8
Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements
Critical Audit Matter Description
The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements.
Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:
|
| • | We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. |
|
|
| • | We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. |
|
|
| • | We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. |
|
|
| • | For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. |
|
|
| • | We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments. |
|
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 29, 2021
We have served as the Company's auditor since 1983.
98
PART II
Item 9, 9A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
| $ | |
|
| $ | |
|
| $ | |
|
| Service and other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total revenue |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
|
| |
|
|
| |
|
|
| |
|
| Service and other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total cost of revenue |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Gross margin |
|
| |
|
|
| |
|
|
| |
|
| Research and development |
|
| |
|
|
| |
|
|
| |
|
| Sales and marketing |
|
| |
|
|
| |
|
|
| |
|
| General and administrative |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Operating income |
|
| |
|
|
| |
|
|
| |
|
| Other income, net |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Income before income taxes |
|
| |
|
|
| |
|
|
| |
|
| Provision for income taxes |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net income |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| $ | |
|
| $ | |
|
| $ | |
|
| Diluted |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
| |||||||||
| Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| |
|
|
| |
|
|
| |
|
| Diluted |
|
| |
|
|
| |
|
|
| |
|
|
|
| |||||||||||
Refer to accompanying notes.
55
PART II
Item 8
COMPREHENSIVE INCOME STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Net income |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Net change related to investments |
|
| |
|
|
| |
|
|
| ( | ) |
| Translation adjustments and other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss) |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
56
PART II
Item 8
BALANCE SHEETS
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2020 |
|
| 2019 |
| ||
|
|
|
| ||||||
| Assets |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | |
|
| $ | |
|
| Short-term investments |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total cash, cash equivalents, and short-term investments |
|
| |
|
|
| |
|
| Accounts receivable, net of allowance for doubtful accounts of $ |
|
| |
|
|
| |
|
| Inventories |
|
| |
|
|
| |
|
| Other current assets |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current assets |
|
| |
|
|
| |
|
| Property and equipment, net of accumulated depreciation of $ |
|
| |
|
|
| |
|
| Operating lease right-of-use assets |
|
| |
|
|
| |
|
| Equity investments |
|
| |
|
|
| |
|
| Goodwill |
|
| |
|
|
| |
|
| Intangible assets, net |
|
| |
|
|
| |
|
| Other long-term assets |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
| $ | |
|
| $ | |
|
| Current portion of long-term debt |
|
| |
|
|
| |
|
| Accrued compensation |
|
| |
|
|
| |
|
| Short-term income taxes |
|
| |
|
|
| |
|
| Short-term unearned revenue |
|
| |
|
|
| |
|
| Other current liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current liabilities |
|
| |
|
|
| |
|
| Long-term debt |
|
| |
|
|
| |
|
| Long-term income taxes |
|
| |
|
|
| |
|
| Long-term unearned revenue |
|
| |
|
|
| |
|
| Deferred income taxes |
|
| |
|
|
| |
|
| Operating lease liabilities |
|
| |
|
|
| |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Commitments and contingencies |
|
| |
|
|
| |
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock and paid-in capital – shares authorized |
|
| |
|
|
| |
|
| Retained earnings |
|
| |
|
|
| |
|
| Accumulated other comprehensive income (loss) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities and stockholders’ equity |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
57
PART II
Item 8
CASH FLOWS STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
| |||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Operations |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
| $ | |
|
| $ | |
|
| $ | |
|
| Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation, amortization, and other |
|
| |
|
|
| |
|
|
| |
|
| Stock-based compensation expense |
|
| |
|
|
| |
|
|
| |
|
| Net recognized gains on investments and derivatives |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Deferred income taxes |
|
| |
|
|
| ( | ) |
|
| ( | ) |
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Inventories |
|
| |
|
|
| |
|
|
| ( | ) |
| Other current assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Other long-term assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Accounts payable |
|
| |
|
|
| |
|
|
| |
|
| Unearned revenue |
|
| |
|
|
| |
|
|
| |
|
| Income taxes |
|
| ( | ) |
|
| |
|
|
| |
|
| Other current liabilities |
|
| |
|
|
| |
|
|
| |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
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| Net cash from operations |
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| Financing |
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| Repayments of short-term debt, maturities of 90 days or less, net |
|
| |
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| |
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| ( | ) |
| Proceeds from issuance of debt |
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| |
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| Cash premium on debt exchange |
|
| ( | ) |
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| |
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| |
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| Repayments of debt |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock issued |
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| |
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| |
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| |
|
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock cash dividends paid |
|
| ( | ) |
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| ( | ) |
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| ( | ) |
| Other, net |
|
| ( | ) |
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| ( | ) |
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| ( | ) |
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| Net cash used in financing |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| Investing |
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| Additions to property and equipment |
|
| ( | ) |
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| ( | ) |
|
| ( | ) |
| Acquisition of companies, net of cash acquired, and purchases of intangible and other assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Purchases of investments |
|
| ( | ) |
|
| ( | ) |
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| ( | ) |
| Maturities of investments |
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| |
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| Sales of investments |
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| Other, net |
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| ( | ) |
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| ( | ) |
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| Net cash used in investing |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| Effect of foreign exchange rates on cash and cash equivalents |
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| ( | ) |
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| ( | ) |
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| Net change in cash and cash equivalents |
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| |
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| ( | ) |
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| Cash and cash equivalents, beginning of period |
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| Cash and cash equivalents, end of period |
| $ | |
|
| $ | |
|
| $ | |
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Refer to accompanying notes.
58
PART II
Item 8
STOCKHOLDERS’ EQUITY STATEMENTS
| (In millions) |
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| Year Ended June 30, |
| 2020 |
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| 2019 |
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| 2018 |
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| |||||||||
| Common stock and paid-in capital |
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| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Common stock issued |
|
| |
|
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| |
|
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| |
|
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
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| ( | ) |
| Stock-based compensation expense |
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| |
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| |
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| |
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| Other, net |
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| ( | ) |
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| |
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| ( | ) |
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| Balance, end of period |
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| Retained earnings |
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| Balance, beginning of period |
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| |
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| Net income |
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| |
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| Common stock cash dividends |
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| ( | ) |
|
| ( | ) |
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| ( | ) |
| Common stock repurchased |
|
| ( | ) |
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| ( | ) |
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| ( | ) |
| Cumulative effect of accounting changes |
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| |
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| ( | ) |
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| Balance, end of period |
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| |
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| Accumulated other comprehensive income (loss) |
|
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| Balance, beginning of period |
|
| ( | ) |
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| ( | ) |
|
| |
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| Other comprehensive income (loss) |
|
| |
|
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| |
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| ( | ) |
| Cumulative effect of accounting changes |
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| |
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| ( | ) |
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| Balance, end of period |
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| |
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| ( | ) |
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| ( | ) |
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| |||
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| |||
| Total stockholders’ equity |
| $ | |
|
| $ | |
|
| $ | |
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| Cash dividends declared per common share |
| $ | |
|
| $ | |
|
| $ | |
|
|
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|
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|
Refer to accompanying notes.
59
PART II
Item 8
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or net cash from or used in operating, financing, or investing on our consolidated cash flows statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to the recent outbreak of a novel strain of the coronavirus (“COVID-19”).
In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
60
PART II
Item 8
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.
Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
61
PART II
Item 8
Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
As of June 30, 2020 and 2019, long-term accounts receivable, net of allowance for doubtful accounts, was $
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Activity in the allowance for doubtful accounts was as follows:
| (In millions) |
| ||||||||||||
|
|
|
| |||||||||||
|
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
| |
|
|
|
|
|
|
|
|
|
|
| ||||
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
| |
| Charged to costs and other |
|
| |
|
|
| |
|
|
| |
| |
| Write-offs |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) | |
|
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|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Balance, end of period |
| $ | |
|
| $ | |
|
| $ | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts included in our consolidated balance sheets:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
| June 30, |
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Accounts receivable, net of allowance for doubtful accounts |
| $ | |
|
| $ | |
|
| $ | |
|
| Other long-term assets |
|
| |
|
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| |
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| |
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|
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| |||
|
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|
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| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
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|
62
PART II
Item 8
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2020 and 2019, our financing receivables, net were $
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
63
PART II
Item 8
Research and Development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
64
PART II
Item 8
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in other comprehensive income. Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of, and business outlook, for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a quarterly basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
Derivatives
Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in earnings with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings.
For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
| • | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. |
|
| • | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts. |
65
PART II
Item 8
|
| • | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. |
We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use,
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
66
PART II
Item 8
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Financial Instruments – Targeted Improvements to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board (“FASB”) issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. We adopted the standard effective July 1, 2019. As we did not hold derivative instruments requiring an adjustment upon adoption, there was no impact in our consolidated financial statements. Adoption of the standard enhanced the presentation of the effects of our hedging instruments and the hedged items in our consolidated financial statements to increase the understandability of the results of our hedging strategies.
Recent Accounting Guidance Not Yet Adopted
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We have evaluated the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems. We continue to monitor economic implications of the COVID-19 pandemic. Based on current market conditions, adoption of the standard will not have a material impact on our consolidated financial statements.
Accounting for Income Taxes
In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021, with early adoption permitted. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
67
PART II
Item 8
The components of basic and diluted EPS were as follows:
| (In millions, except earnings per share) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income available for common shareholders (A) |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average outstanding shares of common stock (B) |
|
| |
|
|
| |
|
|
| |
|
| Dilutive effect of stock-based awards |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock and common stock equivalents (C) |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic (A/B) |
| $ | |
|
| $ | |
|
| $ | |
|
| Diluted (A/C) |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Interest and dividends income |
| $ | |
|
| $ | |
|
| $ | |
|
| Interest expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Net recognized gains on investments |
|
| |
|
|
| |
|
|
| |
|
| Net gains (losses) on derivatives |
|
| |
|
|
| |
|
|
| ( | ) |
| Net losses on foreign currency remeasurements |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Other, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Realized gains from sales of available-for-sale securities |
| $ | |
|
| $ | |
|
| $ | |
|
| Realized losses from sales of available-for-sale securities |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Other-than-temporary impairments of investments |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains (losses) on equity investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Net realized gains on investments sold |
| $ | |
|
| $ | |
|
| $ | |
|
| Net unrealized gains on investments still held |
|
| |
|
|
| |
|
|
| |
|
| Impairments of investments |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
PART II
Item 8
NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
| (In millions) |
| Fair Value Level |
|
| Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
PART II
Item 8
| (In millions) |
| Fair Value Level |
|
| Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
|
| Short-term Investments |
|
| Equity Investments |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( |
|
|
| |
|
|
| ( |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2020 and 2019, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized |
|
| Fair Value |
|
| Unrealized |
|
| Total |
|
| ||||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
| Municipal securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
PART II
Item 8
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
|
| Total Unrealized Losses |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Total Fair Value |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.
Debt Investment Maturities
| (In millions) |
| Cost Basis |
|
| Estimated Fair Value |
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Due in one year or less |
| $ | |
|
| $ | |
|
| Due after one year through five years |
|
| |
|
|
| |
|
| Due after five years through 10 years |
|
| |
|
|
| |
|
| Due after 10 years |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currencies
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.
Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
71
PART II
Item 8
Interest Rate
Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
| (In millions) |
| June 30, 2020 |
|
| June 30, 2019 |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
| $ | |
|
| $ | |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Interest rate contracts purchased |
|
| |
|
|
| |
|
|
|
|
| ||||||
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
|
| |
|
|
| |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Other contracts purchased |
|
| |
|
|
| |
|
| Other contracts sold |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
PART II
Item 8
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
|
|
| Derivative |
| Derivative |
| Derivative |
| Derivative |
| |||||||
| (In millions) |
| Assets |
| Liabilities |
| Assets |
| Liabilities |
| |||||||
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
| June 30, 2019 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Interest rate contracts |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Other contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross amounts of derivatives |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Gross amounts of derivatives offset in the balance sheet |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
| Cash collateral received |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amounts of derivatives |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Short-term investments |
| $ | |
|
| $ | 0 |
|
| $ | ( | ) |
| $ | 0 |
|
| Other current assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other long-term assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other current liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
| Other long-term liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $
The following table presents the fair value of our derivatives instruments on a gross basis:
| (In millions) |
| Level 1 |
|
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
PART II
Item 8
Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:
| (In millions) |
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Year Ended June 30, |
| 2020 |
| 2019 | 2018 |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Revenue |
|
| Other (Expense), |
|
| Revenue |
|
| Other (Expense), |
|
| Revenue |
|
| Other Income (Expense), Net |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Fair Value Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Hedged items |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Excluded from effectiveness assessment |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Hedged items |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Equity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
| Hedged items |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Excluded from effectiveness assessment |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount reclassified from accumulated other comprehensive income |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Excluded from effectiveness assessment |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Other contracts |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| Included in effectiveness assessment |
| $ | ( | ) |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
NOTE 6 — INVENTORIES
The components of inventories were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2020 |
|
| 2019 |
| ||
|
|
|
| ||||||
| Raw materials |
| $ | |
|
| $ | |
|
| Work in process |
|
| |
|
|
| |
|
| Finished goods |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
74
PART II
Item 8
NOTE 7 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2020 |
|
| 2019 |
| ||
|
|
|
| ||||||
| Land |
| $ | |
|
| $ | |
|
| Buildings and improvements |
|
| |
|
|
| |
|
| Leasehold improvements |
|
| |
|
|
| |
|
| Computer equipment and software |
|
| |
|
|
| |
|
| Furniture and equipment |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, at cost |
|
| |
|
|
| |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
During fiscal years 2020, 2019, and 2018, depreciation expense was $
During fiscal year 2020, we recorded an impairment charge of $
NOTE 8 — BUSINESS COMBINATIONS
GitHub, Inc.
On
The allocation of the purchase price to goodwill was completed as of June 30, 2019.
| (In millions) |
| |||
|
|
|
| ||
|
|
|
|
|
|
| Cash, cash equivalents, and short-term investments |
| $ | |
|
| Goodwill |
|
| |
|
| Intangible assets |
|
| |
|
| Other assets |
|
| |
|
| Other liabilities |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.
75
PART II
Item 8
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions) |
| Amount |
|
| Weighted Average Life |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Customer-related |
| $ | |
|
|
| |
|
| Technology-based |
|
| |
|
|
| |
|
| Marketing-related |
|
| |
|
|
| |
|
| Contract-based |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Transactions recognized separately from the purchase price allocation were approximately $
Other
During fiscal year 2020, we completed
NOTE 9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) |
|
| June 30, 2018 |
|
|
| Acquisitions |
|
|
| Other |
|
|
| June 30, 2019 |
|
|
| Acquisitions |
|
|
| Other |
|
|
| June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| | (a) |
|
| | (a) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
76
PART II
Item 8
NOTE 10 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
| (In millions) |
| Gross |
|
| Accumulated |
|
| Net Carrying |
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, |
|
|
|
|
|
|
| 2020 |
|
|
|
|
|
|
|
| 2019 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Technology-based |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| Customer-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Marketing-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Contract-based |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | | (a) |
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
No material impairments of intangible assets were identified during fiscal years 2020, 2019, or 2018. We estimate that we have no significant residual value related to our intangible assets.
The components of intangible assets acquired during the periods presented were as follows:
| (In millions) |
| Amount |
|
| Weighted Average Life |
|
| Amount |
|
| Weighted Average Life |
| ||||
|
|
| |||||||||||||||
|
|
|
|
|
|
| |||||||||||
| Year Ended June 30, |
| 2020 |
|
|
|
|
| 2019 |
|
|
|
| ||||
|
|
|
|
|
| ||||||||||||
| Technology-based |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| Customer-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Marketing-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Contract-based |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2020:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2021 |
| $ | |
|
| 2022 |
|
| |
|
| 2023 |
|
| |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| Thereafter |
|
| |
|
|
|
| |||
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
77
PART II
Item 8
NOTE 11 — DEBT
The components of debt were as follows:
| (In millions, issuance by calendar year) |
| Maturities (calendar year) |
| Stated Interest Rate |
|
| Effective Interest Rate |
| June 30, 2020 |
|
| June 30, 2019 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
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| |
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| |||||||||
|
|
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|
|
|
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| ||||||||||
| Total face value |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Unamortized discount and issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
| Hedge fair value adjustments (b) |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Premium on debt exchange (a) |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| |
| ||||||
|
|
|
|
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| |||||||||
|
|
|
|
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|
|
|
|
|
|
|
|
| ||||||||||
| Total debt |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
| ||||||
| (a) | |
| (b) | |
As of June 30, 2020 and 2019, the estimated fair value of long-term debt, including the current portion, was $
Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually.
The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2020:
| (In millions) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ending June 30, |
|
|
|
|
|
|
|
|
|
|
| 2021 |
| $ | |
|
| 2022 |
|
| |
|
| 2023 |
|
| |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| Thereafter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
78
PART II
Item 8
NOTE 12 — INCOME TAXES
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge of $
In fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $
Provision for Income Taxes
The components of the provision for income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | |
|
| $ | |
|
| $ | |
|
| U.S. state and local |
|
| |
|
|
| |
|
|
| |
|
| Foreign |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | |
|
| $ | ( | ) |
| $ | ( | ) |
| U.S. state and local |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Foreign |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred taxes |
| $ | |
|
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| U.S. |
| $ | |
|
| $ | |
|
| $ | |
|
| Foreign |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
PART II
Item 8
Effective Tax Rate
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Federal statutory rate |
|
| |
|
|
| |
|
|
| |
|
| Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign earnings taxed at lower rates |
|
| ( |
|
|
| ( |
|
|
| ( |
|
| Impact of the enactment of the TCJA |
|
| |
|
|
| |
|
|
| |
|
| Impact of intangible property transfers |
|
| |
|
|
| ( |
|
|
| |
|
| Foreign-derived intangible income deduction |
|
| ( |
|
|
| ( |
|
|
| |
|
| State income taxes, net of federal benefit |
|
| |
|
|
| |
|
|
| |
|
| Research and development credit |
|
| ( |
|
|
| ( |
|
|
| ( |
|
| Excess tax benefits relating to stock-based compensation |
|
| ( |
|
|
| ( |
|
|
| ( |
|
| Interest, net |
|
| |
|
|
| |
|
|
| |
|
| Other reconciling items, net |
|
| |
|
|
| |
|
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effective rate |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $
The increase in our effective tax rate for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $
80
PART II
Item 8
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| June 30, |
| 2020 |
|
| 2019 |
| ||
|
|
|
| ||||||
| Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| Accruals, reserves, and other expenses |
|
| |
|
|
| |
|
| Loss and credit carryforwards |
|
| |
|
|
| |
|
| Depreciation and amortization |
|
| |
|
|
| |
|
| Leasing liabilities |
|
| |
|
|
| |
|
| Unearned revenue |
|
| |
|
|
| |
|
| Other |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax assets |
|
| |
|
|
| |
|
| Less valuation allowance |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax assets, net of valuation allowance |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Book/tax basis differences in investments and debt |
| $ | ( | ) |
| $ | ( | ) |
| Unearned revenue |
|
| |
|
|
| ( | ) |
| Leasing assets |
|
| ( | ) |
|
| ( | ) |
| Deferred GILTI tax liabilities |
|
| ( | ) |
|
| ( | ) |
| Other |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax liabilities |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Reported As |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Other long-term assets |
| $ | |
|
| $ | |
|
| Long-term deferred income tax liabilities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
As of June 30, 2020, we had federal, state, and foreign net operating loss carryforwards of $
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized. In fiscal year 2020, we removed $
Income taxes paid, net of refunds, were $
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2020, 2019, and 2018, were $
81
PART II
Item 8
As of June 30, 2020, 2019, and 2018, we had accrued interest expense related to uncertain tax positions of $
The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Beginning unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
| Decreases related to settlements |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Increases for tax positions related to the current year |
|
| |
|
|
| |
|
|
| |
|
| Increases for tax positions related to prior years |
|
| |
|
|
| |
|
|
| |
|
| Decreases for tax positions related to prior years |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Decreases due to lapsed statutes of limitations |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years
As of June 30, 2020, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years
NOTE 13 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2020 |
|
| 2019 |
| ||
|
|
|
| ||||||
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Changes in unearned revenue were as follows:
| (In millions) |
|
|
|
| |
|
|
| ||||
|
|
|
|
|
| |
| Year Ended June 30, 2020 |
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
|
| $ | |
|
| Deferral of revenue |
|
|
| |
|
| Recognition of unearned revenue |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
|
| $ | |
|
|
|
|
|
|
|
|
82
PART II
Item 8
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $
NOTE 14 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. Our leases have remaining lease terms of
The components of lease expense were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Operating lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization of right-of-use assets |
| $ | |
|
| $ | |
|
| $ | |
|
| Interest on lease liabilities |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating cash flows from operating leases |
| $ | |
|
| $ | |
|
| $ | |
|
| Operating cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
| Financing cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
PART II
Item 8
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||
| June 30, |
| 2020 |
|
| 2019 |
| ||
|
|
|
| ||||||
| Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating lease right-of-use assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Operating lease liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, at cost |
| $ | |
|
| $ | |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Maturities of lease liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Year Ending June 30, |
| Operating Leases |
|
| Finance Leases |
| ||
|
|
|
| ||||||
| 2021 |
| $ | |
|
| $ | |
|
| 2022 |
|
| |
|
|
| |
|
| 2023 |
|
| |
|
|
| |
|
| 2024 |
|
| |
|
|
| |
|
| 2025 |
|
| |
|
|
| |
|
| Thereafter |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease payments |
|
| |
|
|
| |
|
| Less imputed interest |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $
During fiscal year 2020, we recorded an impairment charge of $
84
PART II
Item 8
NOTE 15 — CONTINGENCIES
Patent and Intellectual Property Claims
There were 64 patent infringement cases pending against Microsoft as of June 30, 2020, none of which are material individually or in aggregate.
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.
The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions, and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement has been approved by the courts in British Columbia, Ontario, and Quebec, and the claims administration process will commence once each court approves the form of notice to the class.
Other Antitrust Litigation and Claims
China State Administration for Industry and Commerce Investigation
In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. The SAMR has presented its preliminary views as to certain possible violations of China's Anti-Monopoly Law, and discussions are expected to continue.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 40 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.
In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing is expected to occur in the second quarter of fiscal year 2021.
85
PART II
Item 8
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2020, we accrued aggregate legal liabilities of $
NOTE 16 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Balance, beginning of year |
|
| |
|
|
| |
|
|
| |
|
| Issued |
|
| |
|
|
| |
|
|
| |
|
| Repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of year |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $
On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $
86
PART II
Item 8
We repurchased the following shares of common stock under the share repurchase programs:
| (In millions) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| First Quarter |
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
| Second Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Third Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Fourth Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased during the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Record Date |
|
| Payment Date |
| Dividend Per Share |
|
| Amount |
| ||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
| Fiscal Year 2020 |
|
|
|
|
|
|
|
| (In millions) |
| ||||||
|
|
|
|
|
| ||||||||||||
| |
|
| |
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dividend declared on June 17, 2020 was included in other current liabilities as of June 30, 2020.
87
PART II
Item 8
NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Unrealized gains (losses), net of tax of $( |
|
| ( | ) |
|
| |
|
|
| |
|
| Reclassification adjustments for gains included in revenue |
|
| |
|
|
| ( | ) |
|
| ( | ) |
| Tax expense included in provision for income taxes |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives, net of tax of $( |
|
| ( | ) |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | ( | ) |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| Unrealized gains (losses), net of tax of $ |
|
| |
|
|
| |
|
|
| ( | ) |
| Reclassification adjustments for (gains) losses included in other income (expense), net |
|
| |
|
|
| |
|
|
| ( | ) |
| Tax expense (benefit) included in provision for income taxes |
|
| ( | ) |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net change related to investments, net of tax of $ |
|
| |
|
|
| |
|
|
| ( | ) |
| Cumulative effect of accounting changes |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| Translation adjustments and other, net of tax effects of $ |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss), end of period |
| $ | |
|
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. As of June 30, 2020, an aggregate of
Stock-based compensation expense and related income tax benefits were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| $ | |
|
| Income tax benefits related to stock-based compensation |
|
| |
|
|
| |
|
|
| |
|
|
|
| |||||||||||
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of
88
PART II
Item 8
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| Year ended June 30, |
|
|
|
| 2020 |
|
|
|
|
| 2019 |
|
|
|
|
| 2018 |
| |
|
|
|
|
|
|
| ||||||||||||||
| Dividends per share (quarterly amounts) |
| $ | | – | |
|
| $ | | – | |
|
| $ | | – | |
| |
| Interest rates |
|
| | – | |
|
|
| | – | |
|
|
| | – | |
| |
|
|
|
|
| ||||||||||||||||
|
|
|
|
| ||||||||||||||||
During fiscal year 2020, the following activity occurred under our stock plans:
| Shares |
|
| Weighted Average Grant-Date Fair Value |
| ||||
|
|
| |||||||
|
|
| |||||||
| (In millions) |
|
|
|
| ||||
|
| ||||||||
| Stock Awards |
| |||||||
|
|
|
| ||||||
| Nonvested balance, beginning of year |
|
| |
|
| $ | |
|
| Granted (a) |
|
| |
|
|
| |
|
| Vested |
|
| ( | ) |
|
| |
|
| Forfeited |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nonvested balance, end of year |
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
As of June 30, 2020, there was approximately $
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at
| (Shares in millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Shares purchased |
|
| |
|
|
| |
|
|
| |
|
| Average price per share |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
| |||||||||||
As of June 30, 2020,
89
PART II
Item 8
Savings Plan
We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute
NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
|
| • | Office Commercial, including Office 365 subscriptions, the Office portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”). |
|
| • | Office Consumer, including Microsoft 365 Consumer (formerly Office 365 Consumer) subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive. |
|
| • | LinkedIn, including Talent Solutions, Learning Solutions, Marketing Solutions, Sales Solutions, and Premium Subscriptions. |
|
| • | Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises. |
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:
|
| • | Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related CALs; and GitHub. |
|
| • | Enterprise Services, including Premier Support Services and Microsoft Consulting Services. |
More Personal Computing
Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:
|
| • | Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things; and MSN advertising. |
|
| • | Devices, including Surface and PC accessories. |
90
PART II
Item 8
|
| • | Gaming, including Xbox hardware and Xbox content and services, comprising Xbox Live (transactions, subscriptions, cloud services, and advertising), video games, and third-party video game royalties. |
|
| • | Search. |
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: legal, including settlements and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments.
Segment revenue and operating income were as follows during the periods presented:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| United States (a) |
| $ | |
|
| $ | |
|
| $ | |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
91
PART II
Item 8
Revenue from external customers, classified by significant product and service offerings, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| Server products and cloud services |
| $ | |
|
| $ | |
|
| $ | |
|
| Office products and cloud services |
|
| |
|
|
| |
|
|
| |
|
| Windows |
|
| |
|
|
| |
|
|
| |
|
| Gaming |
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
| Search advertising |
|
| |
|
|
| |
|
|
| |
|
| Devices |
|
| |
|
|
| |
|
|
| |
|
| Enterprise Services |
|
| |
|
|
| |
|
|
| |
|
| Other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| June 30, |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
| |||||||||
| United States |
| $ | |
|
| $ | |
|
| $ | |
|
| Ireland |
|
| |
|
|
| |
|
|
| |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
PART II
Item 8
NOTE 20 — QUARTERLY INFORMATION (UNAUDITED)
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| September 30 |
|
| December 31 |
|
| March 31 |
|
| June 30 |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Gross margin |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Operating income |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Net income |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Basic earnings per share |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Diluted earnings per share |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Gross margin |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Operating income |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Net income (a) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Basic earnings per share |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Diluted earnings per share (b) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
| (b) | |
93
PART II
Item 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 30, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
94
PART II
Item 8
Revenue Recognition – Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
|
| • | Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. |
|
|
| • | The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. |
|
|
| • | Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). |
|
|
| • | Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. |
|
Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:
|
| • | We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. |
|
|
| • | We evaluated management's significant accounting policies related to these customer agreements for reasonableness. |
|
|
| • | We selected a sample of customer agreements and performed the following procedures: |
|
|
| – | Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. |
|
|
| – | Tested management's identification and treatment of contract terms. |
|
|
| – | Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
|
|
| • | We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. |
|
|
| • | We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. |
|
95
PART II
Item 8
Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements
Critical Audit Matter Description
The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements.
Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:
|
| • | We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. |
|
|
| • | We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. |
|
|
| • | We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. |
|
|
| • | For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. |
|
|
| • | We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments. |
|
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 30, 2020
We have served as the Company's auditor since 1983.
96
PART II
Item 9, 9A
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
| $ | 66,069 |
|
| $ | 64,497 |
|
| $ | 63,811 |
|
| Service and other |
|
| 59,774 |
|
|
| 45,863 |
|
|
| 32,760 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total revenue |
|
| 125,843 |
|
|
| 110,360 |
|
|
| 96,571 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
|
| 16,273 |
|
|
| 15,420 |
|
|
| 15,175 |
|
| Service and other |
|
| 26,637 |
|
|
| 22,933 |
|
|
| 19,086 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total cost of revenue |
|
| 42,910 |
|
|
| 38,353 |
|
|
| 34,261 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Gross margin |
|
| 82,933 |
|
|
| 72,007 |
|
|
| 62,310 |
|
| Research and development |
|
| 16,876 |
|
|
| 14,726 |
|
|
| 13,037 |
|
| Sales and marketing |
|
| 18,213 |
|
|
| 17,469 |
|
|
| 15,461 |
|
| General and administrative |
|
| 4,885 |
|
|
| 4,754 |
|
|
| 4,481 |
|
| Restructuring |
|
| 0 |
|
|
| 0 |
|
|
| 306 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Operating income |
|
| 42,959 |
|
|
| 35,058 |
|
|
| 29,025 |
|
| Other income, net |
|
| 729 |
|
|
| 1,416 |
|
|
| 876 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Income before income taxes |
|
| 43,688 |
|
|
| 36,474 |
|
|
| 29,901 |
|
| Provision for income taxes |
|
| 4,448 |
|
|
| 19,903 |
|
|
| 4,412 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net income |
| $ | 39,240 |
|
| $ | 16,571 |
|
| $ | 25,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| $ | 5.11 |
|
| $ | 2.15 |
|
| $ | 3.29 |
|
| Diluted |
| $ | 5.06 |
|
| $ | 2.13 |
|
| $ | 3.25 |
|
|
|
|
|
| |||||||||
|
|
|
|
| |||||||||
| Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| 7,673 |
|
|
| 7,700 |
|
|
| 7,746 |
|
| Diluted |
|
| 7,753 |
|
|
| 7,794 |
|
|
| 7,832 |
|
|
|
| |||||||||||
Refer to accompanying notes.
51
PART II
Item 8
COMPREHENSIVE INCOME STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Net income |
| $ | 39,240 |
|
| $ | 16,571 |
|
| $ | 25,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives |
|
| (173 | ) |
|
| 39 |
|
|
| (218 | ) |
| Net change related to investments |
|
| 2,405 |
|
|
| (2,717 | ) |
|
| (1,116 | ) |
| Translation adjustments and other |
|
| (318 | ) |
|
| (178 | ) |
|
| 167 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss) |
|
| 1,914 |
|
|
| (2,856 | ) |
|
| (1,167 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income |
| $ | 41,154 |
|
| $ | 13,715 |
|
| $ | 24,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes. Refer to Note 18 – Accumulated Other Comprehensive Income (Loss) for further information.
52
PART II
Item 8
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2019 |
|
| 2018 |
| ||
|
|
|
| ||||||
| Assets |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 11,356 |
|
| $ | 11,946 |
|
| Short-term investments |
|
| 122,463 |
|
|
| 121,822 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total cash, cash equivalents, and short-term investments |
|
| 133,819 |
|
|
| 133,768 |
|
| Accounts receivable, net of allowance for doubtful accounts of $411 and $377 |
|
| 29,524 |
|
|
| 26,481 |
|
| Inventories |
|
| 2,063 |
|
|
| 2,662 |
|
| Other |
|
| 10,146 |
|
|
| 6,751 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current assets |
|
| 175,552 |
|
|
| 169,662 |
|
| Property and equipment, net of accumulated depreciation of $35,330 and $29,223 |
|
| 36,477 |
|
|
| 29,460 |
|
| Operating lease right-of-use assets |
|
| 7,379 |
|
|
| 6,686 |
|
| Equity investments |
|
| 2,649 |
|
|
| 1,862 |
|
| Goodwill |
|
| 42,026 |
|
|
| 35,683 |
|
| Intangible assets, net |
|
| 7,750 |
|
|
| 8,053 |
|
| Other long-term assets |
|
| 14,723 |
|
|
| 7,442 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total assets |
| $ | 286,556 |
|
| $ | 258,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
| $ | 9,382 |
|
| $ | 8,617 |
|
| Current portion of long-term debt |
|
| 5,516 |
|
|
| 3,998 |
|
| Accrued compensation |
|
| 6,830 |
|
|
| 6,103 |
|
| Short-term income taxes |
|
| 5,665 |
|
|
| 2,121 |
|
| Short-term unearned revenue |
|
| 32,676 |
|
|
| 28,905 |
|
| Other |
|
| 9,351 |
|
|
| 8,744 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current liabilities |
|
| 69,420 |
|
|
| 58,488 |
|
| Long-term debt |
|
| 66,662 |
|
|
| 72,242 |
|
| Long-term income taxes |
|
| 29,612 |
|
|
| 30,265 |
|
| Long-term unearned revenue |
|
| 4,530 |
|
|
| 3,815 |
|
| Deferred income taxes |
|
| 233 |
|
|
| 541 |
|
| Operating lease liabilities |
|
| 6,188 |
|
|
| 5,568 |
|
| Other long-term liabilities |
|
| 7,581 |
|
|
| 5,211 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities |
|
| 184,226 |
|
|
| 176,130 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Commitments and contingencies |
|
|
|
|
|
|
|
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock and paid-in capital – shares authorized 24,000; outstanding 7,643 and 7,677 |
|
| 78,520 |
|
|
| 71,223 |
|
| Retained earnings |
|
| 24,150 |
|
|
| 13,682 |
|
| Accumulated other comprehensive loss |
|
| (340 | ) |
|
| (2,187 | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
|
| 102,330 |
|
|
| 82,718 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities and stockholders’ equity |
| $ | 286,556 |
|
| $ | 258,848 |
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
53
PART II
Item 8
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
| |||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Operations |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
| $ | 39,240 |
|
| $ | 16,571 |
|
| $ | 25,489 |
|
| Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation, amortization, and other |
|
| 11,682 |
|
|
| 10,261 |
|
|
| 8,778 |
|
| Stock-based compensation expense |
|
| 4,652 |
|
|
| 3,940 |
|
|
| 3,266 |
|
| Net recognized gains on investments and derivatives |
|
| (792 | ) |
|
| (2,212 | ) |
|
| (2,073 | ) |
| Deferred income taxes |
|
| (6,463 | ) |
|
| (5,143 | ) |
|
| (829 | ) |
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| (2,812 | ) |
|
| (3,862 | ) |
|
| (1,216 | ) |
| Inventories |
|
| 597 |
|
|
| (465 | ) |
|
| 50 |
|
| Other current assets |
|
| (1,718 | ) |
|
| (952 | ) |
|
| 1,028 |
|
| Other long-term assets |
|
| (1,834 | ) |
|
| (285 | ) |
|
| (917 | ) |
| Accounts payable |
|
| 232 |
|
|
| 1,148 |
|
|
| 81 |
|
| Unearned revenue |
|
| 4,462 |
|
|
| 5,922 |
|
|
| 3,820 |
|
| Income taxes |
|
| 2,929 |
|
|
| 18,183 |
|
|
| 1,792 |
|
| Other current liabilities |
|
| 1,419 |
|
|
| 798 |
|
|
| 356 |
|
| Other long-term liabilities |
|
| 591 |
|
|
| (20 | ) |
|
| (118 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash from operations |
|
| 52,185 |
|
|
| 43,884 |
|
|
| 39,507 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financing |
|
|
|
|
|
|
|
|
|
|
|
|
| Repayments of short-term debt, maturities of 90 days or less, net |
|
| 0 |
|
|
| (7,324 | ) |
|
| (4,963 | ) |
| Proceeds from issuance of debt |
|
| 0 |
|
|
| 7,183 |
|
|
| 44,344 |
|
| Repayments of debt |
|
| (4,000 | ) |
|
| (10,060 | ) |
|
| (7,922 | ) |
| Common stock issued |
|
| 1,142 |
|
|
| 1,002 |
|
|
| 772 |
|
| Common stock repurchased |
|
| (19,543 | ) |
|
| (10,721 | ) |
|
| (11,788 | ) |
| Common stock cash dividends paid |
|
| (13,811 | ) |
|
| (12,699 | ) |
|
| (11,845 | ) |
| Other, net |
|
| (675 | ) |
|
| (971 | ) |
|
| (190 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash from (used in) financing |
|
| (36,887 | ) |
|
| (33,590 | ) |
|
| 8,408 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investing |
|
|
|
|
|
|
|
|
|
|
|
|
| Additions to property and equipment |
|
| (13,925 | ) |
|
| (11,632 | ) |
|
| (8,129 | ) |
| Acquisition of companies, net of cash acquired, and purchases of intangible and other assets |
|
| (2,388 | ) |
|
| (888 | ) |
|
| (25,944 | ) |
| Purchases of investments |
|
| (57,697 | ) |
|
| (137,380 | ) |
|
| (176,905 | ) |
| Maturities of investments |
|
| 20,043 |
|
|
| 26,360 |
|
|
| 28,044 |
|
| Sales of investments |
|
| 38,194 |
|
|
| 117,577 |
|
|
| 136,350 |
|
| Securities lending payable |
|
| 0 |
|
|
| (98 | ) |
|
| (197 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing |
|
| (15,773 | ) |
|
| (6,061 | ) |
|
| (46,781 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of foreign exchange rates on cash and cash equivalents |
|
| (115 | ) |
|
| 50 |
|
|
| 19 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in cash and cash equivalents |
|
| (590 | ) |
|
| 4,283 |
|
|
| 1,153 |
|
| Cash and cash equivalents, beginning of period |
|
| 11,946 |
|
|
| 7,663 |
|
|
| 6,510 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
| $ | 11,356 |
|
| $ | 11,946 |
|
| $ | 7,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
54
PART II
Item 8
STOCKHOLDERS’ EQUITY STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Common stock and paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
| $ | 71,223 |
|
| $ | 69,315 |
|
| $ | 68,178 |
|
| Common stock issued |
|
| 6,829 |
|
|
| 1,002 |
|
|
| 772 |
|
| Common stock repurchased |
|
| (4,195 | ) |
|
| (3,033 | ) |
|
| (2,987 | ) |
| Stock-based compensation expense |
|
| 4,652 |
|
|
| 3,940 |
|
|
| 3,266 |
|
| Other, net |
|
| 11 |
|
|
| (1 | ) |
|
| 86 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| 78,520 |
|
|
| 71,223 |
|
|
| 69,315 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
|
| 13,682 |
|
|
| 17,769 |
|
|
| 13,118 |
|
| Net income |
|
| 39,240 |
|
|
| 16,571 |
|
|
| 25,489 |
|
| Common stock cash dividends |
|
| (14,103 | ) |
|
| (12,917 | ) |
|
| (12,040 | ) |
| Common stock repurchased |
|
| (15,346 | ) |
|
| (7,699 | ) |
|
| (8,798 | ) |
| Cumulative effect of accounting changes |
|
| 677 |
|
|
| (42 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| 24,150 |
|
|
| 13,682 |
|
|
| 17,769 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
|
| (2,187 | ) |
|
| 627 |
|
|
| 1,794 |
|
| Other comprehensive income (loss) |
|
| 1,914 |
|
|
| (2,856 | ) |
|
| (1,167 | ) |
| Cumulative effect of accounting changes |
|
| (67 | ) |
|
| 42 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| (340 | ) |
|
| (2,187 | ) |
|
| 627 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
| $ | 102,330 |
|
| $ | 82,718 |
|
| $ | 87,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash dividends declared per common share |
| $ | 1.84 |
|
| $ | 1.68 |
|
| $ | 1.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
55
PART II
Item 8
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We have recast certain prior period amounts related to investments, derivatives, and fair value measurements to conform to the current period presentation based on our adoption of the new accounting standard for financial instruments. We have recast prior period commercial cloud revenue to include the commercial portion of LinkedIn to provide a comparable view of our commercial cloud business performance. The commercial portion of LinkedIn includes LinkedIn Recruiter, Sales Navigator, premium business subscriptions, and other services for organizations. We have also recast components of the prior period deferred income tax assets and liabilities to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or net cash from or used in operating, financing, or investing on our consolidated cash flows statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized on our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (“OCI”).
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Microsoft Office 365, Microsoft Azure, Microsoft Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
56
PART II
Item 8
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.
Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 20 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
57
PART II
Item 8
Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
As of June 30, 2019 and 2018, long-term accounts receivable, net of allowance for doubtful accounts, was $2.2 billion and $1.8 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Activity in the allowance for doubtful accounts was as follows:
| (In millions) |
| ||||||||||||
|
|
|
| |||||||||||
|
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2019 |
|
|
|
| 2018 |
|
|
| 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
| $ | 397 |
|
|
| $ | 361 |
|
| $ | 409 |
|
| Charged to costs and other |
|
| 153 |
|
|
|
| 134 |
|
|
| 58 |
|
| Write-offs |
|
| (116 | ) |
|
|
| (98 | ) |
|
| (106 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | 434 |
|
|
| $ | 397 |
|
| $ | 361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts included in our consolidated balance sheets:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
|
| 2019 |
|
|
| 2018 |
|
|
| 2017 |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Accounts receivable, net of allowance for doubtful accounts |
| $ | 411 |
|
| $ | 377 |
|
| $ | 345 |
|
| Other long-term assets |
|
| 23 |
|
|
| 20 |
|
|
| 16 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 434 |
|
| $ | 397 |
|
| $ | 361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
PART II
Item 8
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 14 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
59
PART II
Item 8
Research and Development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.6 billion, $1.6 billion, and $1.5 billion in fiscal years 2019, 2018, and 2017, respectively.
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
60
PART II
Item 8
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in OCI. Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method, or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a quarterly basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments on our consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability.
Derivatives
Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items.
For derivative instruments designated as cash flow hedges, the effective portion of the gains and losses are initially reported as a component of OCI and subsequently recognized in revenue when the hedged exposure is recognized in revenue. Gains and losses on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in other income (expense), net.
For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
| • | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. |
61
PART II
Item 8
|
| • | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts. |
|
| • | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. |
We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to three years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
62
PART II
Item 8
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Income Taxes – Intra-Entity Asset Transfers
In October 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. We adopted the guidance effective July 1, 2018. Adoption of the guidance was applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We recorded a net cumulative-effect adjustment that resulted in an increase in retained earnings of $557 million, which reversed the previous deferral of income tax consequences and recorded new deferred tax assets from intra-entity transfers involving assets other than inventory, partially offset by a U.S. deferred tax liability related to global intangible low-taxed income (“GILTI”). Adoption of the standard resulted in an increase in long-term deferred tax assets of $2.8 billion, an increase in long-term deferred tax liabilities of $2.1 billion, and a reduction in other current assets of $152 million. Adoption of the standard had no impact on cash from or used in operating, financing, or investing on our consolidated cash flows statements.
Financial Instruments – Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than OCI.
We adopted the standard effective July 1, 2018. Adoption of the standard was applied using a modified retrospective approach through a cumulative-effect adjustment from accumulated other comprehensive income (“AOCI”) to retained earnings as of the effective date, and we elected to measure equity investments without readily determinable fair values at cost with adjustments for observable changes in price or impairments. The cumulative-effect adjustment included any previously held unrealized gains and losses held in AOCI related to our equity investments carried at fair value as well as the impact of recording the fair value of certain equity investments carried at cost. The impact on our consolidated balance sheets upon adoption was not material. Adoption of the standard had no impact on cash from or used in operating, financing, or investing on our consolidated cash flows statements.
63
PART II
Item 8
Recent Accounting Guidance Not Yet Adopted
Financial Instruments – Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The standard will be effective for us beginning July 1, 2019, with early adoption permitted for any interim or annual period before the effective date. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We evaluated the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems, and do not expect the impact to be material upon adoption.
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as follows:
| (In millions, except earnings per share) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income available for common shareholders (A) |
| $ | 39,240 |
|
| $ | 16,571 |
|
| $ | 25,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average outstanding shares of common stock (B) |
|
| 7,673 |
|
|
| 7,700 |
|
|
| 7,746 |
|
| Dilutive effect of stock-based awards |
|
| 80 |
|
|
| 94 |
|
|
| 86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock and common stock equivalents (C) |
|
| 7,753 |
|
|
| 7,794 |
|
|
| 7,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic (A/B) |
| $ | 5.11 |
|
| $ | 2.15 |
|
| $ | 3.29 |
|
| Diluted (A/C) |
| $ | 5.06 |
|
| $ | 2.13 |
|
| $ | 3.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
64
PART II
Item 8
NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Interest and dividends income |
| $ | 2,762 |
|
| $ | 2,214 |
|
| $ | 1,387 |
|
| Interest expense |
|
| (2,686 | ) |
|
| (2,733 | ) |
|
| (2,222 | ) |
| Net recognized gains on investments |
|
| 648 |
|
|
| 2,399 |
|
|
| 2,583 |
|
| Net gains (losses) on derivatives |
|
| 144 |
|
|
| (187 | ) |
|
| (510 | ) |
| Net losses on foreign currency remeasurements |
|
| (82 | ) |
|
| (218 | ) |
|
| (111 | ) |
| Other, net |
|
| (57 | ) |
|
| (59 | ) |
|
| (251 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | 729 |
|
| $ | 1,416 |
|
| $ | 876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Realized gains from sales of available-for-sale securities |
| $ | 12 |
|
| $ | 27 |
|
| $ | 108 |
|
| Realized losses from sales of available-for-sale securities |
|
| (93 | ) |
|
| (987 | ) |
|
| (162 | ) |
| Other-than-temporary impairments of investments |
|
| (16 | ) |
|
| (6 | ) |
|
| (14 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | (97 | ) |
| $ | (966 | ) |
| $ | (68 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains (losses) on equity investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Net realized gains on investments sold |
| $ | 276 |
|
| $ | 3,406 |
|
| $ | 2,692 |
|
| Net unrealized gains on investments still held |
|
| 479 |
|
|
| 0 |
|
|
| 0 |
|
| Impairments of investments |
|
| (10 | ) |
|
| (41 | ) |
|
| (41 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | 745 |
|
| $ | 3,365 |
|
| $ | 2,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
PART II
Item 8
NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
| (In millions) |
| Fair Value Level |
|
| Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | 2,211 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 2,211 |
|
| $ | 1,773 |
|
| $ | 438 |
|
| $ | 0 |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| 2,018 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,018 |
|
|
| 1,430 |
|
|
| 588 |
|
|
| 0 |
|
| U.S. government securities |
|
| Level 1 |
|
|
| 104,925 |
|
|
| 1,854 |
|
|
| (104 | ) |
|
| 106,675 |
|
|
| 769 |
|
|
| 105,906 |
|
|
| 0 |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| 988 |
|
|
| 0 |
|
|
| 0 |
|
|
| 988 |
|
|
| 698 |
|
|
| 290 |
|
|
| 0 |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| 6,350 |
|
|
| 4 |
|
|
| (8 | ) |
|
| 6,346 |
|
|
| 2,506 |
|
|
| 3,840 |
|
|
| 0 |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| 3,554 |
|
|
| 10 |
|
|
| (3 | ) |
|
| 3,561 |
|
|
| 0 |
|
|
| 3,561 |
|
|
| 0 |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| 7,437 |
|
|
| 111 |
|
|
| (7 | ) |
|
| 7,541 |
|
|
| 0 |
|
|
| 7,541 |
|
|
| 0 |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| 15 |
|
|
| 0 |
|
|
| 0 |
|
|
| 15 |
|
|
| 0 |
|
|
| 15 |
|
|
| 0 |
|
| Municipal securities |
|
| Level 2 |
|
|
| 242 |
|
|
| 48 |
|
|
| 0 |
|
|
| 290 |
|
|
| 0 |
|
|
| 290 |
|
|
| 0 |
|
| Municipal securities |
|
| Level 3 |
|
|
| 7 |
|
|
| 0 |
|
|
| 0 |
|
|
| 7 |
|
|
| 0 |
|
|
| 7 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | 127,747 |
|
| $ | 2,027 |
|
| $ | (122 | ) |
| $ | 129,652 |
|
| $ | 7,176 |
|
| $ | 122,476 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 973 |
|
| $ | 409 |
|
| $ | 0 |
|
| $ | 564 |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,085 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,058 |
|
| $ | 409 |
|
| $ | 0 |
|
| $ | 2,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,771 |
|
| $ | 3,771 |
|
| $ | 0 |
|
| $ | 0 |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (13 | ) |
|
| 0 |
|
|
| (13 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 136,468 |
|
| $ | 11,356 |
|
| $ | 122,463 |
|
| $ | 2,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
PART II
Item 8
| (In millions) |
| Fair Value Level |
|
| Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
|
| Short-term Investments |
|
| Equity Investments |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | 2,513 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 2,513 |
|
| $ | 2,215 |
|
| $ | 298 |
|
| $ | 0 |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| 2,058 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,058 |
|
|
| 1,865 |
|
|
| 193 |
|
|
| 0 |
|
| U.S. government securities |
|
| Level 1 |
|
|
| 108,120 |
|
|
| 62 |
|
|
| (1,167 | ) |
|
| 107,015 |
|
|
| 2,280 |
|
|
| 104,735 |
|
|
| 0 |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| 1,742 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,742 |
|
|
| 1,398 |
|
|
| 344 |
|
|
| 0 |
|
| Foreign government bonds |
|
| Level 1 |
|
|
| 22 |
|
|
| 0 |
|
|
| 0 |
|
|
| 22 |
|
|
| 0 |
|
|
| 22 |
|
|
| 0 |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| 5,063 |
|
|
| 1 |
|
|
| (10 | ) |
|
| 5,054 |
|
|
| 0 |
|
|
| 5,054 |
|
|
| 0 |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| 3,864 |
|
|
| 4 |
|
|
| (13 | ) |
|
| 3,855 |
|
|
| 0 |
|
|
| 3,855 |
|
|
| 0 |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| 6,929 |
|
|
| 21 |
|
|
| (56 | ) |
|
| 6,894 |
|
|
| 0 |
|
|
| 6,894 |
|
|
| 0 |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| 15 |
|
|
| 0 |
|
|
| 0 |
|
|
| 15 |
|
|
| 0 |
|
|
| 15 |
|
|
| 0 |
|
| Municipal securities |
|
| Level 2 |
|
|
| 271 |
|
|
| 37 |
|
|
| (1 | ) |
|
| 307 |
|
|
| 0 |
|
|
| 307 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | 130,597 |
|
| $ | 125 |
|
| $ | (1,247 | ) |
| $ | 129,475 |
|
| $ | 7,758 |
|
| $ | 121,717 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 533 |
|
| $ | 246 |
|
| $ | 0 |
|
| $ | 287 |
|
| Equity investments |
|
| Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18 |
|
|
| 0 |
|
|
| 0 |
|
|
| 18 |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,558 |
|
|
| 0 |
|
|
| 1 |
|
|
| 1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 2,109 |
|
| $ | 246 |
|
| $ | 1 |
|
| $ | 1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,942 |
|
| $ | 3,942 |
|
| $ | 0 |
|
| $ | 0 |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 104 |
|
|
| 0 |
|
|
| 104 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 135,630 |
|
| $ | 11,946 |
|
| $ | 121,822 |
|
| $ | 1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments. |
Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2019 and 2018, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.2 billion and $697 million, respectively.
As of June 30, 2019, we had no collateral received under agreements for loaned securities. As of June 30, 2018, collateral received under agreements for loaned securities was $1.8 billion and primarily comprised U.S. government and agency securities.
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized |
|
| Fair Value |
|
| Unrealized |
|
| Total |
|
| ||||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| U.S. government and agency securities |
| $ | 1,491 |
|
| $ | (1 | ) |
| $ | 39,158 |
|
| $ | (103 | ) |
| $ | 40,649 |
|
| $ | (104 | ) |
| Foreign government bonds |
|
| 25 |
|
|
| 0 |
|
|
| 77 |
|
|
| (8 | ) |
|
| 102 |
|
|
| (8 | ) |
| Mortgage- and asset-backed securities |
|
| 664 |
|
|
| (1 | ) |
|
| 378 |
|
|
| (2 | ) |
|
| 1,042 |
|
|
| (3 | ) |
| Corporate notes and bonds |
|
| 498 |
|
|
| (3 | ) |
|
| 376 |
|
|
| (4 | ) |
|
| 874 |
|
|
| (7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 2,678 |
|
| $ | (5 | ) |
| $ | 39,989 |
|
| $ | (117 | ) |
| $ | 42,667 |
|
| $ | (122 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
PART II
Item 8
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
|
| Total Unrealized Losses |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Total Fair Value |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. government and agency securities |
| $ | 82,352 |
|
| $ | (1,064 | ) |
| $ | 4,459 |
|
| $ | (103 | ) |
| $ | 86,811 |
|
| $ | (1,167 | ) |
| Foreign government bonds |
|
| 3,457 |
|
|
| (7 | ) |
|
| 13 |
|
|
| (3 | ) |
|
| 3,470 |
|
|
| (10 | ) |
| Mortgage- and asset-backed securities |
|
| 2,072 |
|
|
| (9 | ) |
|
| 96 |
|
|
| (4 | ) |
|
| 2,168 |
|
|
| (13 | ) |
| Corporate notes and bonds |
|
| 3,111 |
|
|
| (43 | ) |
|
| 301 |
|
|
| (13 | ) |
|
| 3,412 |
|
|
| (56 | ) |
| Municipal securities |
|
| 45 |
|
|
| (1 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 45 |
|
|
| (1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 91,037 |
|
| $ | (1,124 | ) |
| $ | 4,869 |
|
| $ | (123 | ) |
| $ | 95,906 |
|
| $ | (1,247 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.
Debt Investment Maturities
| (In millions) |
| Cost Basis |
|
| Estimated Fair Value |
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Due in one year or less |
| $ | 53,200 |
|
| $ | 53,124 |
|
| Due after one year through five years |
|
| 47,016 |
|
|
| 47,783 |
|
| Due after five years through 10 years |
|
| 26,658 |
|
|
| 27,824 |
|
| Due after 10 years |
|
| 873 |
|
|
| 921 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 127,747 |
|
| $ | 129,652 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Equity
Securities held in our equity investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. In the past, to hedge our price risk, we also used and designated equity derivatives as hedging instruments, including puts, calls, swaps, and forwards.
68
PART II
Item 8
Other
Interest Rate
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts, and over-the-counter swap and option contracts, none of which are designated as hedging instruments.
In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest available delivery date.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low-cost method of managing exposure to individual credit risks or groups of credit risks.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2019, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
| (In millions) |
| June 30, 2019 |
|
| June 30, 2018 |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts sold |
| $ | 6,034 |
|
| $ | 11,101 |
|
|
|
|
| ||||||
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
|
| 14,889 |
|
|
| 9,425 |
|
| Foreign exchange contracts sold |
|
| 15,614 |
|
|
| 13,374 |
|
| Equity contracts purchased |
|
| 680 |
|
|
| 49 |
|
| Equity contracts sold |
|
| 5 |
|
|
| 5 |
|
| Other contracts purchased |
|
| 1,327 |
|
|
| 878 |
|
| Other contracts sold |
|
| 451 |
|
|
| 472 |
|
|
|
|
|
|
|
|
|
|
|
69
PART II
Item 8
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
|
|
| Derivative |
| Derivative |
| Derivative |
| Derivative |
| |||||||
| (In millions) |
| Assets |
| Liabilities |
| Assets |
| Liabilities |
| |||||||
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
| June 30, 2018 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | 0 |
|
| $ | 0 |
|
| $ | 174 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| 0 |
|
|
| (93 | ) |
|
| 95 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| 204 |
|
|
| (172 | ) |
|
| 256 |
|
|
| (197 | ) |
| Equity contracts |
|
| 38 |
|
|
| 0 |
|
|
| 2 |
|
|
| (7 | ) |
| Other contracts |
|
| 8 |
|
|
| (7 | ) |
|
| 11 |
|
|
| (3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross amounts of derivatives |
|
| 250 |
|
|
| (272 | ) |
|
| 538 |
|
|
| (207 | ) |
| Gross amounts of derivatives offset in the balance sheet |
|
| (113 | ) |
|
| 114 |
|
|
| (152 | ) |
|
| 153 |
|
| Cash collateral received |
|
| 0 |
|
|
| (78 | ) |
|
| 0 |
|
|
| (235 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amounts of derivatives |
| $ | 137 |
|
| $ | (236 | ) |
| $ | 386 |
|
| $ | (289 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Short-term investments |
| $ | (13 | ) |
| $ | 0 |
|
| $ | 104 |
|
| $ | 0 |
|
| Other current assets |
|
| 146 |
|
|
| 0 |
|
|
| 260 |
|
|
| 0 |
|
| Other long-term assets |
|
| 4 |
|
|
| 0 |
|
|
| 22 |
|
|
| 0 |
|
| Other current liabilities |
|
| 0 |
|
|
| (221 | ) |
|
| 0 |
|
|
| (288 | ) |
| Other long-term liabilities |
|
| 0 |
|
|
| (15 | ) |
|
| 0 |
|
|
| (1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 137 |
|
| $ | (236 | ) |
| $ | 386 |
|
| $ | (289 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $247 million and $272 million, respectively, as of June 30, 2019, and $533 million and $207 million, respectively, as of June 30, 2018.
The following table presents the fair value of our derivatives instruments on a gross basis:
| (In millions) |
| Level 1 |
|
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
| $ | 0 |
|
| $ | 247 |
|
| $ | 3 |
|
| $ | 250 |
|
| Derivative liabilities |
|
| 0 |
|
|
| (272 | ) |
|
| 0 |
|
|
| (272 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
|
| 1 |
|
|
| 535 |
|
|
| 2 |
|
|
| 538 |
|
| Derivative liabilities |
|
| (1 | ) |
|
| (206 | ) |
|
| 0 |
|
|
| (207 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
PART II
Item 8
Fair Value Hedge Gains (Losses)
We recognized in other income (expense), net the following gains (losses) on contracts designated as fair value hedges and their related hedged items:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Foreign Exchange Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Derivatives |
| $ | 38 |
|
| $ | 25 |
|
| $ | 441 |
|
| Hedged items |
|
| 130 |
|
|
| 78 |
|
|
| (386 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total amount of ineffectiveness |
| $ | 168 |
|
| $ | 103 |
|
| $ | 55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Equity Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Derivatives |
| $ | 0 |
|
| $ | (324 | ) |
| $ | (74 | ) |
| Hedged items |
|
| 0 |
|
|
| 324 |
|
|
| 74 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total amount of ineffectiveness |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of equity contracts excluded from effectiveness assessment |
| $ | 0 |
|
| $ | 80 |
|
| $ | (80 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
Cash Flow Hedge Gains (Losses)
We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
| ||||||||||
|
|
|
|
|
|
| |||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Effective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Gains recognized in other comprehensive income (loss), net of tax of $1, $11, and $4 |
| $ | 159 |
|
| $ | 219 |
|
| $ | 328 |
|
| Gains reclassified from accumulated other comprehensive income (loss) into revenue |
|
| 341 |
|
|
| 185 |
|
|
| 555 |
|
|
|
|
|
| |||||||||
| Amount Excluded from Effectiveness Assessment and Ineffective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Losses recognized in other income (expense), net |
|
| (64 | ) |
|
| (255 | ) |
|
| (389 | ) |
|
|
| |||||||||||
We do not have any net derivative gains included in AOCI as of June 30, 2019 that will be reclassified into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during fiscal year 2019.
Non-designated Derivative Gains (Losses)
We recognized in other income (expense), net the following gains (losses) on derivatives not designated as hedging instruments:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Foreign exchange contracts |
| $ | (97 | ) |
| $ | (33 | ) |
| $ | (117 | ) |
| Equity contracts |
|
| 3 |
|
|
| (87 | ) |
|
| (114 | ) |
| Other contracts |
|
| 35 |
|
|
| (17 | ) |
|
| (3 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | (59 | ) |
| $ | (137 | ) |
| $ | (234 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
PART II
Item 8
NOTE 6 — INVENTORIES
The components of inventories were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2019 |
|
| 2018 |
| ||
|
|
|
| ||||||
| Raw materials |
| $ | 399 |
|
| $ | 655 |
|
| Work in process |
|
| 53 |
|
|
| 54 |
|
| Finished goods |
|
| 1,611 |
|
|
| 1,953 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | 2,063 |
|
| $ | 2,662 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2019 |
|
| 2018 |
| ||
|
|
|
| ||||||
| Land |
| $ | 1,540 |
|
| $ | 1,254 |
|
| Buildings and improvements |
|
| 26,288 |
|
|
| 20,604 |
|
| Leasehold improvements |
|
| 5,316 |
|
|
| 4,735 |
|
| Computer equipment and software |
|
| 33,823 |
|
|
| 27,633 |
|
| Furniture and equipment |
|
| 4,840 |
|
|
| 4,457 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, at cost |
|
| 71,807 |
|
|
| 58,683 |
|
| Accumulated depreciation |
|
| (35,330 | ) |
|
| (29,223 | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, net |
| $ | 36,477 |
|
| $ | 29,460 |
|
|
|
|
|
|
|
|
|
|
|
During fiscal years 2019, 2018, and 2017, depreciation expense was $9.7 billion, $7.7 billion, and $6.1 billion, respectively. We have committed $4.0 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2019.
NOTE 8 — BUSINESS COMBINATIONS
GitHub, Inc.
On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences. The financial results of GitHub have been included in our consolidated financial statements since the date of the acquisition. GitHub is reported as part of our Intelligent Cloud segment.
72
PART II
Item 8
The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:
| (In millions) |
| |||
|
|
|
| ||
|
|
|
|
|
|
| Cash, cash equivalents, and short-term investments |
| $ | 234 |
|
| Goodwill |
|
| 5,497 |
|
| Intangible assets |
|
| 1,267 |
|
| Other assets |
|
| 143 |
|
| Other liabilities |
|
| (217 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 6,924 |
|
|
|
|
|
|
|
The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions) |
| Amount |
|
| Weighted Average Life |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Customer-related |
| $ | 648 |
|
|
| 8 years |
|
| Technology-based |
|
| 447 |
|
|
| 5 years |
|
| Marketing-related |
|
| 170 |
|
|
| 10 years |
|
| Contract-based |
|
| 2 |
|
|
| 2 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 1,267 |
|
|
| 7 years |
|
|
|
|
|
|
|
|
|
| |
Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.
LinkedIn Corporation
On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn Corporation (“LinkedIn”), the world’s largest professional network on the Internet, for a total purchase price of $27.0 billion. The purchase price consisted primarily of cash of $26.9 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics 365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the acquisition.
73
PART II
Item 8
The allocation of the purchase price to goodwill was completed as of June 30, 2017. The major classes of assets and liabilities to which we allocated the purchase price were as follows:
| (In millions) |
| |||
|
|
|
| ||
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 1,328 |
|
| Short-term investments |
|
| 2,110 |
|
| Other current assets |
|
| 697 |
|
| Property and equipment |
|
| 1,529 |
|
| Intangible assets |
|
| 7,887 |
|
| Goodwill (a) |
|
| 16,803 |
|
| Short-term debt (b) |
|
| (1,323 | ) |
| Other current liabilities |
|
| (1,117 | ) |
| Deferred income taxes |
|
| (774 | ) |
| Other |
|
| (131 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total purchase price |
| $ | 27,009 |
|
|
|
|
|
|
|
| (a) | Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes. |
| (b) | Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt in our consolidated balance sheets. Refer to Note 11 – Debt for further information. |
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions) |
| Amount |
|
| Weighted Average Life |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Customer-related |
| $ | 3,607 |
|
|
| 7 years |
|
| Marketing-related (trade names) |
|
| 2,148 |
|
|
| 20 years |
|
| Technology-based |
|
| 2,109 |
|
|
| 3 years |
|
| Contract-based |
|
| 23 |
|
|
| 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value of intangible assets acquired |
| $ | 7,887 |
|
|
| 9 years |
|
|
|
|
|
|
|
|
|
| |
Our consolidated income statements include the following revenue and operating loss attributable to LinkedIn since the date of acquisition:
| (In millions) |
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
| |
| Year Ended June 30, |
|
|
| 2017 |
|
|
|
|
|
|
|
|
| Revenue |
|
| $ | 2,271 |
|
| Operating loss |
|
|
| (924 | ) |
|
|
|
|
|
| |
Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2015:
| (In millions, except per share amounts) |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended June 30, |
|
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 98,291 |
|
| $ | 94,490 |
|
| Net income |
|
| 25,179 |
|
|
| 19,128 |
|
| Diluted earnings per share |
|
| 3.21 |
|
|
| 2.38 |
|
|
|
|
|
|
|
|
|
|
|
These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented.
74
PART II
Item 8
Other
During fiscal year 2019, we completed 19 additional acquisitions for $1.6 billion, substantially all of which were paid in cash. These entities have been included in our consolidated results of operations since their respective acquisition dates.
NOTE 9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) |
| June 30, 2017 |
| Acquisitions |
| Other |
| June 30, 2018 |
| Acquisitions |
| Other |
| June 30, |
| ||||||||||||||
|
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
| Productivity and Business Processes |
|
| $ | 23,739 |
|
| $ | 72 |
|
| $ | 12 |
|
| $ | 23,823 |
|
| $ | 514 |
|
| $ | (60 | ) |
| $ | 24,277 |
|
| Intelligent Cloud |
|
|
| 5,555 |
|
|
| 164 |
|
|
| (16 | ) |
|
| 5,703 |
|
|
| 5,605 | (a) |
|
| 43 | (a) |
|
| 11,351 |
|
| More Personal Computing |
|
|
| 5,828 |
|
|
| 394 |
|
|
| (65 | ) |
|
| 6,157 |
|
|
| 289 |
|
|
| (48 | ) |
|
| 6,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
| $ | 35,122 |
|
| $ | 630 |
|
| $ | (69 | ) |
| $ | 35,683 |
|
| $ | 6,408 |
|
| $ | (65 | ) |
| $ | 42,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes goodwill of $5.5 billion related to GitHub. See Note 8 – Business Combinations for further information. |
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
No instances of impairment were identified in our May 1, 2019, May 1, 2018, or May 1, 2017 tests. As of June 30, 2019 and 2018, accumulated goodwill impairment was $11.3 billion.
NOTE 10 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
| (In millions) |
| Gross |
|
| Accumulated |
|
| Net Carrying |
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, |
|
|
|
|
|
|
| 2019 |
|
|
|
|
|
|
|
| 2018 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Technology-based |
| $ | 7,691 |
|
| $ | (5,771 | ) |
| $ | 1,920 |
|
| $ | 7,220 |
|
| $ | (5,018 | ) |
| $ | 2,202 |
|
| Customer-related |
|
| 4,709 |
|
|
| (1,785 | ) |
|
| 2,924 |
|
|
| 4,031 |
|
|
| (1,205 | ) |
|
| 2,826 |
|
| Marketing-related |
|
| 4,165 |
|
|
| (1,327 | ) |
|
| 2,838 |
|
|
| 4,006 |
|
|
| (1,071 | ) |
|
| 2,935 |
|
| Contract-based |
|
| 574 |
|
|
| (506 | ) |
|
| 68 |
|
|
| 679 |
|
|
| (589 | ) |
|
| 90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 17,139 | (a) |
| $ | (9,389 | ) |
| $ | 7,750 |
|
| $ | 15,936 |
|
| $ | (7,883 | ) |
| $ | 8,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes intangible assets of $1.3 billion related to GitHub. See Note 8 – Business Combinations for further information. |
No material impairments of intangible assets were identified during fiscal years 2019, 2018, or 2017. We estimate that we have no significant residual value related to our intangible assets.
75
PART II
Item 8
The components of intangible assets acquired during the periods presented were as follows:
| (In millions) |
| Amount |
|
| Weighted Average Life |
|
| Amount |
|
| Weighted Average Life |
| ||||
|
|
| |||||||||||||||
|
|
|
|
|
|
| |||||||||||
| Year Ended June 30, |
| 2019 |
|
|
|
|
| 2018 |
|
|
|
| ||||
|
|
|
|
|
| ||||||||||||
| Technology-based |
| $ | 814 |
|
|
| 5 years |
|
| $ | 178 |
|
|
| 4 years |
|
| Marketing-related |
|
| 177 |
|
|
| 10 years |
|
|
| 14 |
|
|
| 5 years |
|
| Contract-based |
|
| 7 |
|
|
| 3 years |
|
|
| 14 |
|
|
| 4 years |
|
| Customer-related |
|
| 710 |
|
|
| 8 years |
|
|
| 13 |
|
|
| 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 1,708 |
|
|
| 7 years |
|
| $ | 219 |
|
|
| 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $1.9 billion, $2.2 billion, and $1.7 billion for fiscal years 2019, 2018, and 2017, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2019:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2020 |
| $ | 1,488 |
|
| 2021 |
|
| 1,282 |
|
| 2022 |
|
| 1,187 |
|
| 2023 |
|
| 1,053 |
|
| 2024 |
|
| 737 |
|
| Thereafter |
|
| 2,003 |
|
|
|
| |||
|
|
|
|
|
|
| Total |
| $ | 7,750 |
|
|
|
|
|
|
|
NOTE 11 — DEBT
Short-term Debt
As of June 30, 2019 and 2018, we had no commercial paper issued or outstanding. Effective August 31, 2018, we terminated our credit facilities, which served as back-up for our commercial paper program.
Long-term Debt
As of June 30, 2019, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $72.2 billion and $78.9 billion, respectively. As of June 30, 2018, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $76.2 billion and $77.5 billion, respectively. These estimated fair values are based on Level 2 inputs.
76
PART II
Item 8
The components of our long-term debt, including the current portion, and the associated interest rates were as follows:
| (In millions, except interest rates) |
| Face Value 2019 |
|
| Face Value 2018 |
|
|
| Stated Interest Rate |
|
|
| Effective Interest Rate |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 3, 2018 |
| $ | 0 |
|
| $ | 1,750 |
|
|
| 1.300% |
|
|
| 1.396% |
|
| December 6, 2018 |
|
| 0 |
|
|
| 1,250 |
|
|
| 1.625% |
|
|
| 1.824% |
|
| June 1, 2019 |
|
| 0 |
|
|
| 1,000 |
|
|
| 4.200% |
|
|
| 4.379% |
|
| August 8, 2019 |
|
| 2,500 |
|
|
| 2,500 |
|
|
| 1.100% |
|
|
| 1.203% |
|
| November 1, 2019 |
|
| 18 |
|
|
| 18 |
|
|
| 0.500% |
|
|
| 0.500% |
|
| February 6, 2020 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 1.850% |
|
|
| 1.952% |
|
| February 12, 2020 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 1.850% |
|
|
| 1.935% |
|
| October 1, 2020 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 3.000% |
|
|
| 3.137% |
|
| November 3, 2020 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 2.000% |
|
|
| 2.093% |
|
| February 8, 2021 |
|
| 500 |
|
|
| 500 |
|
|
| 4.000% |
|
|
| 4.082% |
|
| August 8, 2021 |
|
| 2,750 |
|
|
| 2,750 |
|
|
| 1.550% |
|
|
| 1.642% |
|
| December 6, 2021 (a) |
|
| 1,994 |
|
|
| 2,044 |
|
|
| 2.125% |
|
|
| 2.233% |
|
| February 6, 2022 |
|
| 1,750 |
|
|
| 1,750 |
|
|
| 2.400% |
|
|
| 2.520% |
|
| February 12, 2022 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 2.375% |
|
|
| 2.466% |
|
| November 3, 2022 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 2.650% |
|
|
| 2.717% |
|
| November 15, 2022 |
|
| 750 |
|
|
| 750 |
|
|
| 2.125% |
|
|
| 2.239% |
|
| May 1, 2023 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 2.375% |
|
|
| 2.465% |
|
| August 8, 2023 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 2.000% |
|
|
| 2.101% |
|
| December 15, 2023 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 3.625% |
|
|
| 3.726% |
|
| February 6, 2024 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 2.875% |
|
|
| 3.041% |
|
| February 12, 2025 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 2.700% |
|
|
| 2.772% |
|
| November 3, 2025 |
|
| 3,000 |
|
|
| 3,000 |
|
|
| 3.125% |
|
|
| 3.176% |
|
| August 8, 2026 |
|
| 4,000 |
|
|
| 4,000 |
|
|
| 2.400% |
|
|
| 2.464% |
|
| February 6, 2027 |
|
| 4,000 |
|
|
| 4,000 |
|
|
| 3.300% |
|
|
| 3.383% |
|
| December 6, 2028 (a) |
|
| 1,993 |
|
|
| 2,044 |
|
|
| 3.125% |
|
|
| 3.218% |
|
| May 2, 2033 (a) |
|
| 626 |
|
|
| 642 |
|
|
| 2.625% |
|
|
| 2.690% |
|
| February 12, 2035 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 3.500% |
|
|
| 3.604% |
|
| November 3, 2035 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 4.200% |
|
|
| 4.260% |
|
| August 8, 2036 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 3.450% |
|
|
| 3.510% |
|
| February 6, 2037 |
|
| 2,500 |
|
|
| 2,500 |
|
|
| 4.100% |
|
|
| 4.152% |
|
| June 1, 2039 |
|
| 750 |
|
|
| 750 |
|
|
| 5.200% |
|
|
| 5.240% |
|
| October 1, 2040 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 4.500% |
|
|
| 4.567% |
|
| February 8, 2041 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 5.300% |
|
|
| 5.361% |
|
| November 15, 2042 |
|
| 900 |
|
|
| 900 |
|
|
| 3.500% |
|
|
| 3.571% |
|
| May 1, 2043 |
|
| 500 |
|
|
| 500 |
|
|
| 3.750% |
|
|
| 3.829% |
|
| December 15, 2043 |
|
| 500 |
|
|
| 500 |
|
|
| 4.875% |
|
|
| 4.918% |
|
| February 12, 2045 |
|
| 1,750 |
|
|
| 1,750 |
|
|
| 3.750% |
|
|
| 3.800% |
|
| November 3, 2045 |
|
| 3,000 |
|
|
| 3,000 |
|
|
| 4.450% |
|
|
| 4.492% |
|
| August 8, 2046 |
|
| 4,500 |
|
|
| 4,500 |
|
|
| 3.700% |
|
|
| 3.743% |
|
| February 6, 2047 |
|
| 3,000 |
|
|
| 3,000 |
|
|
| 4.250% |
|
|
| 4.287% |
|
| February 12, 2055 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 4.000% |
|
|
| 4.063% |
|
| November 3, 2055 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 4.750% |
|
|
| 4.782% |
|
| August 8, 2056 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 3.950% |
|
|
| 4.033% |
|
| February 6, 2057 |
|
| 2,000 |
|
|
| 2,000 |
|
|
| 4.500% |
|
|
| 4.528% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 72,781 |
|
| $ | 76,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Euro-denominated debt securities. |
The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. Cash paid for interest on our debt for fiscal years 2019, 2018, and 2017 was $2.4 billion, $2.4 billion, and $1.6 billion, respectively. As of June 30, 2019 and 2018, the aggregate debt issuance costs and unamortized discount associated with our long-term debt, including the current portion, were $603 million and $658 million, respectively.
77
PART II
Item 8
Maturities of our long-term debt for each of the next five years and thereafter are as follows:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2020 |
| $ | 5,518 |
|
| 2021 |
|
| 3,750 |
|
| 2022 |
|
| 7,994 |
|
| 2023 |
|
| 2,750 |
|
| 2024 |
|
| 5,250 |
|
| Thereafter |
|
| 47,519 |
|
|
|
| |||
|
|
| |||
| Total |
| $ | 72,781 |
|
|
|
|
|
|
|
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. In fiscal year 2018, the TCJA required us to incur a transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. In addition, the TCJA subjected us to a tax on our GILTI effective July 1, 2018.
Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into our measurement of deferred taxes. We elected the deferred method, under which we recorded the corresponding deferred tax assets and liabilities on our consolidated balance sheets.
During fiscal year 2018, we recorded a net charge of $13.7 billion related to the enactment of the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.9 billion, offset in part by the impact of changes in the tax rate of $4.2 billion, primarily on deferred tax assets and liabilities. During the second quarter of fiscal year 2019, we recorded additional tax expense of $157 million, which related to completing our provisional accounting for GILTI deferred taxes pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.
In the fourth quarter of fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. GILTI tax.
78
PART II
Item 8
Provision for Income Taxes
The components of the provision for income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | 4,718 |
|
| $ | 19,764 |
|
| $ | 2,739 |
|
| U.S. state and local |
|
| 662 |
|
|
| 934 |
|
|
| 30 |
|
| Foreign |
|
| 5,531 |
|
|
| 4,348 |
|
|
| 2,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current taxes |
| $ | 10,911 |
|
| $ | 25,046 |
|
| $ | 5,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | (5,647 | ) |
| $ | (4,292 | ) |
| $ | (554 | ) |
| U.S. state and local |
|
| (1,010 | ) |
|
| (458 | ) |
|
| 269 |
|
| Foreign |
|
| 194 |
|
|
| (393 | ) |
|
| (544 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred taxes |
| $ | (6,463 | ) |
| $ | (5,143 | ) |
| $ | (829 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
| $ | 4,448 |
|
| $ | 19,903 |
|
| $ | 4,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| U.S. |
| $ | 15,799 |
|
| $ | 11,527 |
|
| $ | 6,843 |
|
| Foreign |
|
| 27,889 |
|
|
| 24,947 |
|
|
| 23,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
| $ | 43,688 |
|
| $ | 36,474 |
|
| $ | 29,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Federal statutory rate |
|
| 21.0% |
|
|
| 28.1% |
|
|
| 35.0% |
|
| Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign earnings taxed at lower rates |
|
| (4.1)% |
|
|
| (7.8)% |
|
|
| (11.6)% |
|
| Impact of the enactment of the TCJA |
|
| 0.4% |
|
|
| 37.7% |
|
|
| 0% |
|
| Phone business losses |
|
| 0% |
|
|
| 0% |
|
|
| (5.7)% |
|
| Impact of intangible property transfers |
|
| (5.9)% |
|
|
| 0% |
|
|
| 0% |
|
| Foreign-derived intangible income deduction |
|
| (1.4)% |
|
|
| 0% |
|
|
| 0% |
|
| Research and development credit |
|
| (1.1)% |
|
|
| (1.3)% |
|
|
| (0.9)% |
|
| Excess tax benefits relating to stock-based compensation |
|
| (2.2)% |
|
|
| (2.5)% |
|
|
| (2.1)% |
|
| Interest, net |
|
| 1.0% |
|
|
| 1.2% |
|
|
| 1.4% |
|
| Other reconciling items, net |
|
| 2.5% |
|
|
| (0.8)% |
|
|
| (1.3)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effective rate |
|
| 10.2% |
|
|
| 54.6% |
|
|
| 14.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
PART II
Item 8
The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. The increase from the federal statutory rate in fiscal year 2018 is primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, offset in part by earnings taxed at lower rates in foreign jurisdictions. The decrease from the federal statutory rate in fiscal year 2017 is primarily due to earnings taxed at lower rates in foreign jurisdictions. Our foreign regional operating centers in Ireland, Singapore and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82%, 87%, and 76% of our foreign income before tax in fiscal years 2019, 2018, and 2017, respectively. Other reconciling items, net consists primarily of tax credits, GILTI, and U.S. state income taxes. In fiscal years 2019, 2018, and 2017, there were no individually significant other reconciling items.
The decrease in our effective tax rate for fiscal year 2019 compared to fiscal year 2018 was primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, and a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers. The increase in our effective tax rate for fiscal year 2018 compared to fiscal year 2017 was primarily due to the net charge related to the enactment of the TCJA and the realization of tax benefits attributable to previous Phone business losses in fiscal year 2017.
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
| ||||
| June 30, |
| 2019 |
|
| 2018 |
| ||||
|
|
|
| ||||||||
| Deferred Income Tax Assets |
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Stock-based compensation expense |
| $ | 406 |
|
| $ | 460 |
| ||
| Accruals, reserves, and other expenses |
|
| 2,287 |
|
|
| 1,832 |
| ||
| Loss and credit carryforwards |
|
| 3,518 |
|
|
| 3,369 |
| ||
| Depreciation and amortization |
|
| 7,046 |
|
|
| 351 |
| ||
| Leasing liabilities |
|
| 1,594 |
|
|
| 1,427 |
| ||
| Unearned revenue |
|
| 475 |
|
|
| 0 |
| ||
| Other |
|
| 367 |
|
|
| 56 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred income tax assets |
|
| 15,693 |
|
|
| 7,495 |
| ||
| Less valuation allowance |
|
| (3,214 | ) |
|
| (3,186 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred income tax assets, net of valuation allowance |
| $ | 12,479 |
|
| $ | 4,309 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Unrealized gain on investments and debt |
| $ | (738 | ) |
| $ | 0 |
| ||
| Unearned revenue |
|
| (30 | ) |
|
| (639 | ) | ||
| Depreciation and amortization |
|
| 0 |
|
|
| (1,164 | ) | ||
| Leasing assets |
|
| (1,510 | ) |
|
| (1,366 | ) | ||
| Deferred GILTI tax liabilities |
|
| (2,607 | ) |
|
| (61 | ) | ||
| Other |
|
| (291 | ) |
|
| (251 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred income tax liabilities |
| $ | (5,176 | ) |
| $ | (3,481 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Net deferred income tax assets (liabilities) |
| $ | 7,303 |
|
| $ | 828 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Reported As |
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Other long-term assets |
| $ | 7,536 |
|
| $ | 1,369 |
| ||
| Long-term deferred income tax liabilities |
|
| (233 | ) |
|
| (541 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Net deferred income tax assets (liabilities) |
| $ | 7,303 |
|
| $ | 828 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
80
PART II
Item 8
As of June 30, 2019, we had federal, state and foreign net operating loss carryforwards of $978 million, $770 million, and $11.6 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2020 through 2039, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation, but are expected to be realized with the exception of those which have a valuation allowance.
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized.
Income taxes paid, net of refunds, were $8.4 billion, $5.5 billion, and $2.4 billion in fiscal years 2019, 2018, and 2017, respectively.
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2019, 2018, and 2017, were $13.1 billion, $12.0 billion, and $11.7 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2019, 2018, and 2017 by $12.0 billion, $11.3 billion, and $10.2 billion, respectively.
As of June 30, 2019, 2018, and 2017, we had accrued interest expense related to uncertain tax positions of $3.4 billion, $3.0 billion, and $2.3 billion, respectively, net of income tax benefits. The provision for (benefit from) income taxes for fiscal years 2019, 2018, and 2017 included interest expense related to uncertain tax positions of $515 million, $688 million, and $399 million, respectively, net of income tax benefits.
The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Beginning unrecognized tax benefits |
| $ | 11,961 |
|
| $ | 11,737 |
|
| $ | 10,164 |
|
| Decreases related to settlements |
|
| (316 | ) |
|
| (193 | ) |
|
| (4 | ) |
| Increases for tax positions related to the current year |
|
| 2,106 |
|
|
| 1,445 |
|
|
| 1,277 |
|
| Increases for tax positions related to prior years |
|
| 508 |
|
|
| 151 |
|
|
| 397 |
|
| Decreases for tax positions related to prior years |
|
| (1,113 | ) |
|
| (1,176 | ) |
|
| (49 | ) |
| Decreases due to lapsed statutes of limitations |
|
| 0 |
|
|
| (3 | ) |
|
| (48 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending unrecognized tax benefits |
| $ | 13,146 |
|
| $ | 11,961 |
|
| $ | 11,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. We remain under audit for tax years 2004 to 2013. We expect the IRS to begin an examination of tax years 2014 to 2017 within the next 12 months.
As of June 30, 2019, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact on our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2018, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.
NOTE 13 — RESTRUCTURING CHARGES
In June 2017, management approved a sales and marketing restructuring plan. In fiscal year 2017, we recorded employee severance expenses of $306 million primarily related to this sales and marketing restructuring plan. The actions associated with this restructuring plan were completed as of June 30, 2018.
81
PART II
Item 8
NOTE 14 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2019 |
|
| 2018 |
| ||
|
|
|
| ||||||
| Productivity and Business Processes |
| $ | 16,831 |
|
| $ | 14,864 |
|
| Intelligent Cloud |
|
| 16,988 |
|
|
| 14,706 |
|
| More Personal Computing |
|
| 3,387 |
|
|
| 3,150 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | 37,206 |
|
| $ | 32,720 |
|
|
|
|
|
|
|
|
|
|
|
Changes in unearned revenue were as follows:
| (In millions) |
|
|
|
| |
|
|
| ||||
|
|
|
|
|
| |
| Year Ended June 30, 2019 |
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
|
| $ | 32,720 |
|
| Deferral of revenue |
|
|
| 69,493 |
|
| Recognition of unearned revenue |
|
|
| (65,007 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
|
| $ | 37,206 |
|
|
|
|
|
|
|
|
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted not recognized revenue was $91 billion as of June 30, 2019, of which we expect to recognize approximately 50% of the revenue over the next 12 months and the remainder thereafter. Many customers are committing to our products and services for longer contract terms, which is increasing the percentage of contracted revenue that will be recognized beyond the next 12 months.
NOTE 15 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Year Ended June 30, |
| 2019 |
|
|
| 2018 |
|
|
| 2017 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||||
| Operating lease cost |
| $ | 1,707 |
|
| $ | 1,585 |
|
| $ | 1,412 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Amortization of right-of-use assets |
| $ | 370 |
|
| $ | 243 |
|
| $ | 104 |
| ||
| Interest on lease liabilities |
|
| 247 |
|
|
| 175 |
|
|
| 68 |
| ||
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Total finance lease cost |
| $ | 617 |
|
| $ | 418 |
|
| $ | 172 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
82
PART II
Item 8
Supplemental cash flow information related to leases was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Year Ended June 30, |
| 2019 |
|
|
| 2018 |
|
|
| 2017 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||||
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Operating cash flows from operating leases |
| $ | 1,670 |
|
| $ | 1,522 |
|
| $ | 1,157 |
| ||
| Operating cash flows from finance leases |
|
| 247 |
|
|
| 175 |
|
|
| 68 |
| ||
| Financing cash flows from finance leases |
|
| 221 |
|
|
| 144 |
|
|
| 46 |
| ||
|
|
|
|
|
|
|
|
|
|
| |||||
| Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Operating leases |
|
| 2,303 |
|
|
| 1,571 |
|
|
| 1,270 |
| ||
| Finance leases |
|
| 2,532 |
|
|
| 1,933 |
|
|
| 1,773 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||
| June 30, |
| 2019 |
|
| 2018 |
| ||
|
|
|
| ||||||
| Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating lease right-of-use assets |
| $ | 7,379 |
|
| $ | 6,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | 1,515 |
|
| $ | 1,399 |
|
| Operating lease liabilities |
|
| 6,188 |
|
|
| 5,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating lease liabilities |
| $ | 7,703 |
|
| $ | 6,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, at cost |
| $ | 7,041 |
|
| $ | 4,543 |
|
| Accumulated depreciation |
|
| (774 | ) |
|
| (404 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
| $ | 6,267 |
|
| $ | 4,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | 317 |
|
| $ | 176 |
|
| Other long-term liabilities |
|
| 6,257 |
|
|
| 4,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease liabilities |
| $ | 6,574 |
|
| $ | 4,301 |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| 7 years |
|
|
| 7 years |
|
| Finance leases |
|
| 13 years |
|
|
| 13 years |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| 3.0% |
|
|
| 2.7% |
|
| Finance leases |
|
| 4.6% |
|
|
| 5.2% |
|
|
|
|
|
|
|
|
|
|
|
Maturities of lease liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Year Ending June 30, |
| Operating Leases |
|
| Finance Leases |
| ||
|
|
|
| ||||||
| 2020 |
| $ | 1,678 |
|
| $ | 591 |
|
| 2021 |
|
| 1,438 |
|
|
| 616 |
|
| 2022 |
|
| 1,235 |
|
|
| 626 |
|
| 2023 |
|
| 1,036 |
|
|
| 631 |
|
| 2024 |
|
| 839 |
|
|
| 641 |
|
| Thereafter |
|
| 2,438 |
|
|
| 5,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease payments |
|
| 8,664 |
|
|
| 8,776 |
|
| Less imputed interest |
|
| (961 | ) |
|
| (2,202 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 7,703 |
|
| $ | 6,574 |
|
|
|
|
|
|
|
|
|
|
|
83
PART II
Item 8
As of June 30, 2019, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $2.3 billion and $6.1 billion, respectively. These operating and finance leases will commence between fiscal year 2020 and fiscal year 2022 with lease terms of 1 year to 15 years.
NOTE 16 — CONTINGENCIES
Patent and Intellectual Property Claims
There were 44 patent infringement cases pending against Microsoft as of June 30, 2019, none of which are material individually or in aggregate.
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.
The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions, and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement has been approved by the courts in British Columbia, Ontario, and Quebec, and the claims administration process will commence.
Other Antitrust Litigation and Claims
China State Administration for Industry and Commerce Investigation
In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. The SAMR has presented its preliminary views as to certain possible violations of China's Anti-Monopoly Law, and discussions are expected to continue.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 40 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.
In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing is expected to be scheduled in the second half of calendar year 2019.
84
PART II
Item 8
Employment-Related Litigation
Moussouris v. Microsoft
Current and former female Microsoft employees in certain engineering and information technology roles brought this class action in federal court in Seattle in 2015, alleging systemic gender discrimination in pay and promotions. The plaintiffs moved to certify the class in October 2017. Microsoft filed an opposition in January 2018, attaching an expert report showing no statistically significant disparity in pay and promotions between similarly situated men and women. In June 2018, the court denied the plaintiffs’ motion for class certification. Plaintiffs sought an interlocutory appeal to the U.S. Court of Appeals for the Ninth Circuit, which was granted in September 2018. Oral argument is scheduled for October 2019.
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2019, we accrued aggregate legal liabilities of $386 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $1.0 billion in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our consolidated financial statements for the period in which the effects become reasonably estimable.
NOTE 17 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Balance, beginning of year |
|
| 7,677 |
|
|
| 7,708 |
|
|
| 7,808 |
|
| Issued |
|
| 116 |
|
|
| 68 |
|
|
| 70 |
|
| Repurchased |
|
| (150 | ) |
|
| (99 | ) |
|
| (170 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of year |
|
| 7,643 |
|
|
| 7,677 |
|
|
| 7,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
On September 16, 2013, our Board of Directors approved a share repurchase program (“2013 Share Repurchase Program”) authorizing up to $40.0 billion in share repurchases. The 2013 Share Repurchase Program became effective on October 1, 2013, and was completed on December 22, 2016.
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional $40.0 billion in share repurchases (“2016 Share Repurchase Program”). This share repurchase program commenced on December 22, 2016 following completion of the 2013 Share Repurchase Program, has no expiration date, and may be suspended or discontinued at any time without notice. As of June 30, 2019, $11.4 billion remained of the 2016 Share Repurchase Program.
85
PART II
Item 8
We repurchased the following shares of common stock under the share repurchase programs:
| (In millions) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| First Quarter |
|
| 24 |
|
| $ | 2,600 |
|
|
| 22 |
|
| $ | 1,600 |
|
|
| 63 |
|
| $ | 3,550 |
|
| Second Quarter |
|
| 57 |
|
|
| 6,100 |
|
|
| 22 |
|
|
| 1,800 |
|
|
| 59 |
|
|
| 3,533 |
|
| Third Quarter |
|
| 36 |
|
|
| 3,899 |
|
|
| 34 |
|
|
| 3,100 |
|
|
| 25 |
|
|
| 1,600 |
|
| Fourth Quarter |
|
| 33 |
|
|
| 4,200 |
|
|
| 21 |
|
|
| 2,100 |
|
|
| 23 |
|
|
| 1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
|
| 150 |
|
| $ | 16,799 |
|
|
| 99 |
|
| $ | 8,600 |
|
|
| 170 |
|
| $ | 10,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased in the first and second quarter of fiscal year 2017 were under the 2013 Share Repurchase Program. All other shares repurchased were under the 2016 Share Repurchase Program. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $2.7 billion, $2.1 billion, and $1.5 billion for fiscal years 2019, 2018, and 2017, respectively. All share repurchases were made using cash resources.
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Record Date |
|
| Payment Date |
| Dividend Per Share |
|
| Amount |
| ||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
| Fiscal Year 2019 |
|
|
|
|
|
|
|
| (In millions) |
| ||||||
|
|
|
|
|
| ||||||||||||
| September 18, 2018 |
|
| November 15, 2018 |
|
|
| December 13, 2018 |
|
| $ | 0.46 |
|
| $ | 3,544 |
|
| November 28, 2018 |
|
| February 21, 2019 |
|
|
| March 14, 2019 |
|
|
| 0.46 |
|
|
| 3,526 |
|
| March 11, 2019 |
|
| May 16, 2019 |
|
|
| June 13, 2019 |
|
|
| 0.46 |
|
|
| 3,521 |
|
| June 12, 2019 |
|
| August 15, 2019 |
|
|
| September 12, 2019 |
|
|
| 0.46 |
|
|
| 3,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | 1.84 |
|
| $ | 14,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 19, 2017 |
|
| November 16, 2017 |
|
|
| December 14, 2017 |
|
| $ | 0.42 |
|
| $ | 3,238 |
|
| November 29, 2017 |
|
| February 15, 2018 |
|
|
| March 8, 2018 |
|
|
| 0.42 |
|
|
| 3,232 |
|
| March 12, 2018 |
|
| May 17, 2018 |
|
|
| June 14, 2018 |
|
|
| 0.42 |
|
|
| 3,226 |
|
| June 13, 2018 |
|
| August 16, 2018 |
|
|
| September 13, 2018 |
|
|
| 0.42 |
|
|
| 3,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | 1.68 |
|
| $ | 12,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
The dividend declared on June 12, 2019 was included in other current liabilities as of June 30, 2019.
86
PART II
Item 8
NOTE 18 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | 173 |
|
| $ | 134 |
|
| $ | 352 |
|
| Unrealized gains, net of tax of $2, $11, and $4 |
|
| 160 |
|
|
| 218 |
|
|
| 328 |
|
| Reclassification adjustments for gains included in revenue |
|
| (341 | ) |
|
| (185 | ) |
|
| (555 | ) |
| Tax expense included in provision for income taxes |
|
| 8 |
|
|
| 6 |
|
|
| 9 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (333 | ) |
|
| (179 | ) |
|
| (546 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives, net of tax of $(6), $5, and $(5) |
|
| (173 | ) |
|
| 39 |
|
|
| (218 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | 0 |
|
| $ | 173 |
|
| $ | 134 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | (850 | ) |
| $ | 1,825 |
|
| $ | 2,941 |
|
| Unrealized gains (losses), net of tax of $616, $(427), and $267 |
|
| 2,331 |
|
|
| (1,146 | ) |
|
| 517 |
|
| Reclassification adjustments for (gains) losses included in other income (expense), net |
|
| 93 |
|
|
| (2,309 | ) |
|
| (2,513 | ) |
| Tax expense (benefit) included in provision for income taxes |
|
| (19 | ) |
|
| 738 |
|
|
| 880 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| 74 |
|
|
| (1,571 | ) |
|
| (1,633 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net change related to investments, net of tax of $635, $(1,165), and $(613) |
|
| 2,405 |
|
|
| (2,717 | ) |
|
| (1,116 | ) |
| Cumulative effect of accounting changes |
|
| (67 | ) |
|
| 42 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | 1,488 |
|
| $ | (850 | ) |
| $ | 1,825 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | (1,510 | ) |
| $ | (1,332 | ) |
| $ | (1,499 | ) |
| Translation adjustments and other, net of tax effects of $(1), $0, and $9 |
|
| (318 | ) |
|
| (178 | ) |
|
| 167 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | (1,828 | ) |
| $ | (1,510 | ) |
| $ | (1,332 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss), end of period |
| $ | (340 | ) |
| $ | (2,187 | ) |
| $ | 627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 19 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. As of June 30, 2019, an aggregate of 327 million shares were authorized for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.
Stock-based compensation expense and related income tax benefits were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Stock-based compensation expense |
| $ | 4,652 |
|
| $ | 3,940 |
|
| $ | 3,266 |
|
| Income tax benefits related to stock-based compensation |
|
| 816 |
|
|
| 823 |
|
|
| 1,066 |
|
|
|
| |||||||||||
87
PART II
Item 8
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a four or five-year service period.
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a four-year service period. PSUs generally vest over a three-year performance period. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Dividends per share (quarterly amounts) |
|
| $0.42 - $0.46 |
|
|
| $0.39 - $0.42 |
|
|
| $0.36 - $0.39 |
|
| Interest rates |
|
| 1.8% - 3.1% |
|
|
| 1.7% - 2.9% |
|
|
| 1.2% - 2.2% |
|
|
|
| |||||||||||
During fiscal year 2019, the following activity occurred under our stock plans:
| Shares |
|
| Weighted Average Grant-Date Fair Value |
| ||||
|
|
| |||||||
|
|
| |||||||
| (In millions) |
|
|
|
| ||||
|
| ||||||||
| Stock Awards |
| |||||||
|
|
|
| ||||||
| Nonvested balance, beginning of year |
|
| 174 |
|
| $ | 57.85 |
|
| Granted (a) |
|
| 63 |
|
|
| 107.02 |
|
| Vested |
|
| (77 | ) |
|
| 57.08 |
|
| Forfeited |
|
| (13 | ) |
|
| 69.35 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Nonvested balance, end of year |
|
| 147 |
|
| $ | 78.49 |
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes 2 million, 3 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2019, 2018, and 2017, respectively. |
As of June 30, 2019, there was approximately $8.6 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of 3 years. The weighted average grant-date fair value of stock awards granted was $107.02, $75.88, and $55.64 for fiscal years 2019, 2018, and 2017, respectively. The fair value of stock awards vested was $8.7 billion, $6.6 billion, and $4.8 billion, for fiscal years 2019, 2018, and 2017, respectively.
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Employees purchased the following shares during the periods presented:
| (Shares in millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Shares purchased |
|
| 11 |
|
|
| 13 |
|
|
| 13 |
|
| Average price per share |
| $ | 104.85 |
|
| $ | 76.40 |
|
| $ | 56.36 |
|
|
|
| |||||||||||
As of June 30, 2019, 105 million shares of our common stock were reserved for future issuance through the ESPP.
88
PART II
Item 8
Savings Plan
We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $877 million, $807 million, and $734 million in fiscal years 2019, 2018, and 2017, respectively, and were expensed as contributed.
NOTE 20 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
|
| • | Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”). |
|
| • | Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive. |
|
| • | LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions. |
|
| • | Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises. |
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:
|
| • | Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, GitHub, and Azure. |
|
| • | Enterprise Services, including Premier Support Services and Microsoft Consulting Services. |
More Personal Computing
Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and IT professionals across all devices. This segment primarily comprises:
|
| • | Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things (“IoT”); and MSN advertising. |
|
| • | Devices, including Microsoft Surface, PC accessories, and other intelligent devices. |
|
| • | Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties. |
|
| • | Search. |
89
PART II
Item 8
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: legal, including settlements and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments, including restructuring expenses.
Segment revenue and operating income were as follows during the periods presented:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2019 |
|
|
| 2018 |
|
|
| 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | 41,160 |
|
| $ | 35,865 |
|
| $ | 29,870 |
|
| Intelligent Cloud |
|
| 38,985 |
|
|
| 32,219 |
|
|
| 27,407 |
|
| More Personal Computing |
|
| 45,698 |
|
|
| 42,276 |
|
|
| 39,294 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 125,843 |
|
| $ | 110,360 |
|
| $ | 96,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | 16,219 |
|
| $ | 12,924 |
|
| $ | 11,389 |
|
| Intelligent Cloud |
|
| 13,920 |
|
|
| 11,524 |
|
|
| 9,127 |
|
| More Personal Computing |
|
| 12,820 |
|
|
| 10,610 |
|
|
| 8,815 |
|
| Corporate and Other |
|
| 0 |
|
|
| 0 |
|
|
| (306 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 42,959 |
|
| $ | 35,058 |
|
| $ | 29,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other operating loss comprised restructuring expenses.
No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2019, 2018, or 2017. Revenue, classified by the major geographic areas in which our customers were located, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| United States (a) |
| $ | 64,199 |
|
| $ | 55,926 |
|
| $ | 51,078 |
|
| Other countries |
|
| 61,644 |
|
|
| 54,434 |
|
|
| 45,493 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 125,843 |
|
| $ | 110,360 |
|
| $ | 96,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue. |
90
PART II
Item 8
Revenue from external customers, classified by significant product and service offerings, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| Server products and cloud services |
| $ | 32,622 |
|
| $ | 26,129 |
|
| $ | 21,649 |
|
| Office products and cloud services |
|
| 31,769 |
|
|
| 28,316 |
|
|
| 25,573 |
|
| Windows |
|
| 20,395 |
|
|
| 19,518 |
|
|
| 18,593 |
|
| Gaming |
|
| 11,386 |
|
|
| 10,353 |
|
|
| 9,051 |
|
| Search advertising |
|
| 7,628 |
|
|
| 7,012 |
|
|
| 6,219 |
|
| |
|
| 6,754 |
|
|
| 5,259 |
|
|
| 2,271 |
|
| Enterprise Services |
|
| 6,124 |
|
|
| 5,846 |
|
|
| 5,542 |
|
| Devices |
|
| 6,095 |
|
|
| 5,134 |
|
|
| 5,062 |
|
| Other |
|
| 3,070 |
|
|
| 2,793 |
|
|
| 2,611 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 125,843 |
|
| $ | 110,360 |
|
| $ | 96,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $38.1 billion, $26.6 billion and $16.2 billion in fiscal years 2019, 2018, and 2017, respectively. These amounts are primarily included in Office products and cloud services, Server products and cloud services, and LinkedIn in the table above.
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment; it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| June 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
|
|
|
| |||||||||
| United States |
| $ | 55,252 |
|
| $ | 44,501 |
|
| $ | 42,730 |
|
| Ireland |
|
| 12,958 |
|
|
| 12,843 |
|
|
| 12,889 |
|
| Other countries |
|
| 25,422 |
|
|
| 22,538 |
|
|
| 19,898 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 93,632 |
|
| $ | 79,882 |
|
| $ | 75,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
PART II
Item 8
NOTE 21 — QUARTERLY INFORMATION (UNAUDITED)
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| September 30 |
|
| December 31 |
|
| March 31 |
|
| June 30 |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 29,084 |
|
| $ | 32,471 |
|
| $ | 30,571 |
|
| $ | 33,717 |
|
| $ | 125,843 |
|
| Gross margin |
|
| 19,179 |
|
|
| 20,048 |
|
|
| 20,401 |
|
|
| 23,305 |
|
|
| 82,933 |
|
| Operating income |
|
| 9,955 |
|
|
| 10,258 |
|
|
| 10,341 |
|
|
| 12,405 |
|
|
| 42,959 |
|
| Net income (a) |
|
| 8,824 |
|
|
| 8,420 |
|
|
| 8,809 |
|
|
| 13,187 |
|
|
| 39,240 |
|
| Basic earnings per share |
|
| 1.15 |
|
|
| 1.09 |
|
|
| 1.15 |
|
|
| 1.72 |
|
|
| 5.11 |
|
| Diluted earnings per share (b) |
|
| 1.14 |
|
|
| 1.08 |
|
|
| 1.14 |
|
|
| 1.71 |
|
|
| 5.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 24,538 |
|
| $ | 28,918 |
|
| $ | 26,819 |
|
| $ | 30,085 |
|
| $ | 110,360 |
|
| Gross margin |
|
| 16,260 |
|
|
| 17,854 |
|
|
| 17,550 |
|
|
| 20,343 |
|
|
| 72,007 |
|
| Operating income |
|
| 7,708 |
|
|
| 8,679 |
|
|
| 8,292 |
|
|
| 10,379 |
|
|
| 35,058 |
|
| Net income (loss) (c) |
|
| 6,576 |
|
|
| (6,302 | ) |
|
| 7,424 |
|
|
| 8,873 |
|
|
| 16,571 |
|
| Basic earnings (loss) per share |
|
| 0.85 |
|
|
| (0.82 | ) |
|
| 0.96 |
|
|
| 1.15 |
|
|
| 2.15 |
|
| Diluted earnings (loss) per share (d) |
|
| 0.84 |
|
|
| (0.82 | ) |
|
| 0.95 |
|
|
| 1.14 |
|
|
| 2.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Reflects the $157 million net charge related to the enactment of the TCJA for the second quarter and the $2.6 billion net income tax benefit related to the intangible property transfers for the fourth quarter, which together increased net income by $2.4 billion for fiscal year 2019. See Note 12 – Income Taxes for further information. |
| (b) | Reflects the net charge related to the enactment of the TCJA and the net income tax benefit related to the intangible property transfers, which decreased (increased) diluted EPS $0.02 for the second quarter, $(0.34) for the fourth quarter, and $(0.31) for fiscal year 2019. |
| (c) | Reflects the net charge (benefit) related to the enactment of the TCJA of $13.8 billion for the second quarter, $(104) million for the fourth quarter, and $13.7 billion for fiscal year 2018. |
92
PART II
Item 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 1, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Company’s Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
93
PART II
Item 8
Revenue Recognition — Refer to Note 1 to the Financial Statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
|
| • | Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. |
|
| • | Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. |
|
| • | The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. |
|
| • | Estimation of variable consideration when determining the amount of revenue to recognize (e.g., customer credits, incentives, and in certain instances, estimation of customer usage of products and services). |
Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:
|
| • | We tested the effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. |
|
| • | We evaluated management’s significant accounting policies related to these customer agreements for reasonableness. |
|
| • | We selected a sample of customer agreements and performed the following procedures: |
|
| • | Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. |
|
| • | Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration. |
|
| • | Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
|
| • | We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately. |
|
| • | We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. |
94
PART II
Item 8
Income Taxes — Uncertain Tax Positions — Refer to Note 12 to the Financial Statements
Critical Audit Matter Description
The Company’s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service (“IRS”). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company’s financial statements.
Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:
|
| • | We evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. |
|
| • | We read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. |
|
| • | We tested the reasonableness of management’s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. |
|
| • | For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. |
|
| • | We evaluated the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments. |
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
August 1, 2019
We have served as the Company’s auditor since 1983.
95
PART II
Item 9, 9A
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
| $ | 64,497 |
|
| $ | 63,811 |
|
| $ | 67,336 |
|
| Service and other |
|
| 45,863 |
|
|
| 32,760 |
|
|
| 23,818 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total revenue |
|
| 110,360 |
|
|
| 96,571 |
|
|
| 91,154 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
|
| 15,420 |
|
|
| 15,175 |
|
|
| 17,880 |
|
| Service and other |
|
| 22,933 |
|
|
| 19,086 |
|
|
| 14,900 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total cost of revenue |
|
| 38,353 |
|
|
| 34,261 |
|
|
| 32,780 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Gross margin |
|
| 72,007 |
|
|
| 62,310 |
|
|
| 58,374 |
|
| Research and development |
|
| 14,726 |
|
|
| 13,037 |
|
|
| 11,988 |
|
| Sales and marketing |
|
| 17,469 |
|
|
| 15,461 |
|
|
| 14,635 |
|
| General and administrative |
|
| 4,754 |
|
|
| 4,481 |
|
|
| 4,563 |
|
| Impairment and restructuring |
|
| 0 |
|
|
| 306 |
|
|
| 1,110 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Operating income |
|
| 35,058 |
|
|
| 29,025 |
|
|
| 26,078 |
|
| Other income (expense), net |
|
| 1,416 |
|
|
| 876 |
|
|
| (439 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Income before income taxes |
|
| 36,474 |
|
|
| 29,901 |
|
|
| 25,639 |
|
| Provision for income taxes |
|
| 19,903 |
|
|
| 4,412 |
|
|
| 5,100 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net income |
| $ | 16,571 |
|
| $ | 25,489 |
|
| $ | 20,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| $ | 2.15 |
|
| $ | 3.29 |
|
| $ | 2.59 |
|
| Diluted |
| $ | 2.13 |
|
| $ | 3.25 |
|
| $ | 2.56 |
|
|
|
|
|
| |||||||||
|
|
|
|
| |||||||||
| Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| 7,700 |
|
|
| 7,746 |
|
|
| 7,925 |
|
| Diluted |
|
| 7,794 |
|
|
| 7,832 |
|
|
| 8,013 |
|
|
|
|
|
| |||||||||
|
|
|
|
| |||||||||
| Cash dividends declared per common share |
| $ | 1.68 |
|
| $ | 1.56 |
|
| $ | 1.44 |
|
|
|
| |||||||||||
Refer to accompanying notes.
51
PART II
Item 8
COMPREHENSIVE INCOME STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Net income |
| $ | 16,571 |
|
| $ | 25,489 |
|
| $ | 20,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives |
|
| 39 |
|
|
| (218 | ) |
|
| (238 | ) |
| Net change related to investments |
|
| (2,717 | ) |
|
| (1,116 | ) |
|
| (228 | ) |
| Translation adjustments and other |
|
| (178 | ) |
|
| 167 |
|
|
| (262 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive loss |
|
| (2,856 | ) |
|
| (1,167 | ) |
|
| (728 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income |
| $ | 13,715 |
|
| $ | 24,322 |
|
| $ | 19,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes. Refer to Note 19 – Accumulated Other Comprehensive Income (Loss) for further information.
52
PART II
Item 8
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2018 |
|
| 2017 |
| ||
|
|
|
| ||||||
| Assets |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 11,946 |
|
| $ | 7,663 |
|
| Short-term investments |
|
| 121,822 |
|
|
| 125,318 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total cash, cash equivalents, and short-term investments |
|
| 133,768 |
|
|
| 132,981 |
|
| Accounts receivable, net of allowance for doubtful accounts of $377 and $345 |
|
| 26,481 |
|
|
| 22,431 |
|
| Inventories |
|
| 2,662 |
|
|
| 2,181 |
|
| Other |
|
| 6,751 |
|
|
| 5,103 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current assets |
|
| 169,662 |
|
|
| 162,696 |
|
| Property and equipment, net of accumulated depreciation of $29,223 and $24,179 |
|
| 29,460 |
|
|
| 23,734 |
|
| Operating lease right-of-use assets |
|
| 6,686 |
|
|
| 6,555 |
|
| Equity and other investments |
|
| 1,862 |
|
|
| 6,023 |
|
| Goodwill |
|
| 35,683 |
|
|
| 35,122 |
|
| Intangible assets, net |
|
| 8,053 |
|
|
| 10,106 |
|
| Other long-term assets |
|
| 7,442 |
|
|
| 6,076 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total assets |
| $ | 258,848 |
|
| $ | 250,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
| $ | 8,617 |
|
| $ | 7,390 |
|
| Short-term debt |
|
| 0 |
|
|
| 9,072 |
|
| Current portion of long-term debt |
|
| 3,998 |
|
|
| 1,049 |
|
| Accrued compensation |
|
| 6,103 |
|
|
| 5,819 |
|
| Short-term income taxes |
|
| 2,121 |
|
|
| 718 |
|
| Short-term unearned revenue |
|
| 28,905 |
|
|
| 24,013 |
|
| Other |
|
| 8,744 |
|
|
| 7,684 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current liabilities |
|
| 58,488 |
|
|
| 55,745 |
|
| Long-term debt |
|
| 72,242 |
|
|
| 76,073 |
|
| Long-term income taxes |
|
| 30,265 |
|
|
| 13,485 |
|
| Long-term unearned revenue |
|
| 3,815 |
|
|
| 2,643 |
|
| Deferred income taxes |
|
| 541 |
|
|
| 5,734 |
|
| Operating lease liabilities |
|
| 5,568 |
|
|
| 5,372 |
|
| Other long-term liabilities |
|
| 5,211 |
|
|
| 3,549 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities |
|
| 176,130 |
|
|
| 162,601 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Commitments and contingencies |
|
|
|
|
|
|
|
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock and paid-in capital – shares authorized 24,000; outstanding 7,677 and 7,708 |
|
| 71,223 |
|
|
| 69,315 |
|
| Retained earnings |
|
| 13,682 |
|
|
| 17,769 |
|
| Accumulated other comprehensive income (loss) |
|
| (2,187 | ) |
|
| 627 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
|
| 82,718 |
|
|
| 87,711 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities and stockholders’ equity |
| $ | 258,848 |
|
| $ | 250,312 |
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
53
PART II
Item 8
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
| |||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Operations |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
| $ | 16,571 |
|
| $ | 25,489 |
|
| $ | 20,539 |
|
| Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Asset impairments |
|
| 0 |
|
|
| 0 |
|
|
| 630 |
|
| Depreciation, amortization, and other |
|
| 10,261 |
|
|
| 8,778 |
|
|
| 6,622 |
|
| Stock-based compensation expense |
|
| 3,940 |
|
|
| 3,266 |
|
|
| 2,668 |
|
| Net recognized gains on investments and derivatives |
|
| (2,212 | ) |
|
| (2,073 | ) |
|
| (223 | ) |
| Deferred income taxes |
|
| (5,143 | ) |
|
| (829 | ) |
|
| 2,479 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| (3,862 | ) |
|
| (1,216 | ) |
|
| 562 |
|
| Inventories |
|
| (465 | ) |
|
| 50 |
|
|
| 600 |
|
| Other current assets |
|
| (952 | ) |
|
| 1,028 |
|
|
| (1,212 | ) |
| Other long-term assets |
|
| (285 | ) |
|
| (917 | ) |
|
| (1,110 | ) |
| Accounts payable |
|
| 1,148 |
|
|
| 81 |
|
|
| 88 |
|
| Unearned revenue |
|
| 5,922 |
|
|
| 3,820 |
|
|
| 2,565 |
|
| Income taxes |
|
| 18,183 |
|
|
| 1,792 |
|
|
| (298 | ) |
| Other current liabilities |
|
| 798 |
|
|
| 356 |
|
|
| (179 | ) |
| Other long-term liabilities |
|
| (20 | ) |
|
| (118 | ) |
|
| (406 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash from operations |
|
| 43,884 |
|
|
| 39,507 |
|
|
| 33,325 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financing |
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from issuance (repayments) of short-term debt, maturities of 90 days or less, net |
|
| (7,324 | ) |
|
| (4,963 | ) |
|
| 7,195 |
|
| Proceeds from issuance of debt |
|
| 7,183 |
|
|
| 44,344 |
|
|
| 13,884 |
|
| Repayments of debt |
|
| (10,060 | ) |
|
| (7,922 | ) |
|
| (2,796 | ) |
| Common stock issued |
|
| 1,002 |
|
|
| 772 |
|
|
| 668 |
|
| Common stock repurchased |
|
| (10,721 | ) |
|
| (11,788 | ) |
|
| (15,969 | ) |
| Common stock cash dividends paid |
|
| (12,699 | ) |
|
| (11,845 | ) |
|
| (11,006 | ) |
| Other, net |
|
| (971 | ) |
|
| (190 | ) |
|
| (369 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash from (used in) financing |
|
| (33,590 | ) |
|
| 8,408 |
|
|
| (8,393 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investing |
|
|
|
|
|
|
|
|
|
|
|
|
| Additions to property and equipment |
|
| (11,632 | ) |
|
| (8,129 | ) |
|
| (8,343 | ) |
| Acquisition of companies, net of cash acquired, and purchases of intangible and other assets |
|
| (888 | ) |
|
| (25,944 | ) |
|
| (1,393 | ) |
| Purchases of investments |
|
| (137,380 | ) |
|
| (176,905 | ) |
|
| (129,758 | ) |
| Maturities of investments |
|
| 26,360 |
|
|
| 28,044 |
|
|
| 22,054 |
|
| Sales of investments |
|
| 117,577 |
|
|
| 136,350 |
|
|
| 93,287 |
|
| Securities lending payable |
|
| (98 | ) |
|
| (197 | ) |
|
| 203 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing |
|
| (6,061 | ) |
|
| (46,781 | ) |
|
| (23,950 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of foreign exchange rates on cash and cash equivalents |
|
| 50 |
|
|
| 19 |
|
|
| (67 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in cash and cash equivalents |
|
| 4,283 |
|
|
| 1,153 |
|
|
| 915 |
|
| Cash and cash equivalents, beginning of period |
|
| 7,663 |
|
|
| 6,510 |
|
|
| 5,595 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
| $ | 11,946 |
|
| $ | 7,663 |
|
| $ | 6,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
54
PART II
Item 8
STOCKHOLDERS’ EQUITY STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Common stock and paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
| $ | 69,315 |
|
| $ | 68,178 |
|
| $ | 68,465 |
|
| Common stock issued |
|
| 1,002 |
|
|
| 772 |
|
|
| 668 |
|
| Common stock repurchased |
|
| (3,033 | ) |
|
| (2,987 | ) |
|
| (3,689 | ) |
| Stock-based compensation expense |
|
| 3,940 |
|
|
| 3,266 |
|
|
| 2,668 |
|
| Other, net |
|
| (1 | ) |
|
| 86 |
|
|
| 66 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| 71,223 |
|
|
| 69,315 |
|
|
| 68,178 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
|
| 17,769 |
|
|
| 13,118 |
|
|
| 16,191 |
|
| Net income |
|
| 16,571 |
|
|
| 25,489 |
|
|
| 20,539 |
|
| Common stock cash dividends |
|
| (12,917 | ) |
|
| (12,040 | ) |
|
| (11,329 | ) |
| Common stock repurchased |
|
| (7,699 | ) |
|
| (8,798 | ) |
|
| (12,283 | ) |
| Cumulative effect of accounting change |
|
| (42 | ) |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| 13,682 |
|
|
| 17,769 |
|
|
| 13,118 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
|
| 627 |
|
|
| 1,794 |
|
|
| 2,522 |
|
| Other comprehensive loss |
|
| (2,856 | ) |
|
| (1,167 | ) |
|
| (728 | ) |
| Cumulative effect of accounting change |
|
| 42 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| (2,187 | ) |
|
| 627 |
|
|
| 1,794 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
| $ | 82,718 |
|
| $ | 87,711 |
|
| $ | 83,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
55
PART II
Item 8
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We have recast certain prior period income tax liabilities as discussed in the Recent Tax Legislation section below. We have also recast prior period securities lending payables to other current liabilities in our consolidated balance sheets to conform to the current period presentation. These items had no impact in our consolidated income statements or net cash from or used in operating, financing, or investing in our consolidated cash flows statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments for which we are able to exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments for which we are not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of events that have been recognized in our consolidated financial statements or tax returns; and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (“OCI”).
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Microsoft Office 365, Microsoft Azure, Microsoft Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
56
PART II
Item 8
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.
Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 21 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
57
PART II
Item 8
Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
The opening balance of current and long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 billion as of July 1, 2016.
As of June 30, 2018 and 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $1.8 billion and $1.7 billion, respectively, and are included in other long-term assets in our consolidated balance sheets.
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Activity in the allowance for doubtful accounts was as follows:
| (In millions) |
| |||||||||||||
|
|
|
| ||||||||||||
|
|
|
| ||||||||||||
| Year Ended June 30, |
|
| 2018 |
|
|
|
| 2017 |
|
|
| 2016 |
| |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Balance, beginning of period |
| $ | 361 |
|
|
| $ | 409 |
|
| $ | 289 |
| |
| Charged to costs and other |
|
| 134 |
|
|
|
| 58 |
|
|
| 175 |
| |
| Write-offs |
|
| (98 | ) |
|
|
| (106 | ) |
|
| (55 | ) | |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Balance, end of period |
| $ | 397 |
|
|
| $ | 361 |
|
| $ | 409 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts included in our consolidated balance sheets:
|
|
|
| ||||||||||||
|
|
|
| ||||||||||||
| June 30, |
|
| 2018 |
|
|
|
| 2017 |
|
|
| 2016 |
| |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Accounts receivable, net of allowance for doubtful accounts |
| $ | 377 |
|
|
| $ | 345 |
|
| $ | 392 |
| |
| Other long-term assets |
|
| 20 |
|
|
|
| 16 |
|
|
| 17 |
| |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Total |
| $ | 397 |
|
|
| $ | 361 |
|
| $ | 409 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
58
PART II
Item 8
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 15 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain Internet-based products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
59
PART II
Item 8
Research and Development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.6 billion, $1.5 billion, and $1.6 billion in fiscal years 2018, 2017, and 2016, respectively.
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
60
PART II
Item 8
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
| • | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 non-derivative investments primarily include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. |
|
| • | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, foreign government bonds, mortgage- and asset-backed securities, commercial paper, certificates of deposit, and U.S. agency securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts. |
|
| • | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets and liabilities primarily comprise investments in common and preferred stock, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. |
We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash equivalents and short-term investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in market value, excluding other-than-temporary impairments, are reflected in OCI.
Equity and other investments classified as long-term include both debt and equity instruments. Debt and publicly-traded equity securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in the market value of available-for-sale securities, excluding other-than-temporary impairments, are reflected in OCI. Common and preferred stock and other investments that are restricted for more than one year or are not publicly traded are recorded at cost or using the equity method.
61
PART II
Item 8
We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments in our consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, our intent and ability to hold, or plans to sell, the investment. For fixed-income securities, we also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other income (expense), net and a new cost basis in the investment is established.
Derivatives
Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, the gains (losses) are recognized in earnings in the periods of change together with the offsetting losses (gains) on the hedged items attributed to the risk being hedged. For options designated as fair value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.
For derivative instruments designated as cash flow hedges, the effective portion of the gains (losses) on the derivatives is initially reported as a component of OCI and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings. Gains (losses) on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.
For derivative instruments that are not designated as hedges, gains (losses) from changes in fair values are primarily recognized in other income (expense), net.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to three years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.
62
PART II
Item 8
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
All of our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business. Refer to Note 13 – Income Taxes for further discussion.
63
PART II
Item 8
As a result of the TCJA, we have recast certain prior period income tax liabilities in our consolidated balance sheets to conform to the current period presentation. Previously reported balances were impacted as follows:
| (In millions) |
| As Previously Reported |
|
| As Adjusted |
| ||
|
|
| |||||||
|
|
| |||||||
| Balance Sheets |
|
|
|
|
|
| June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
| Long-term income taxes |
| $ | 0 |
|
| $ | 13,485 |
|
| Other long-term liabilities |
|
| 17,034 |
|
|
| 3,549 |
|
|
|
|
|
|
|
|
|
|
|
These adjustments had no impact in our consolidated income statements or net cash from or used in operating, financing, or investing in our consolidated cash flows statements.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Comprehensive Income – Reclassification of Certain Tax Effects
In February 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance to allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the TCJA. In the second quarter of fiscal year 2018, we remeasured our deferred taxes related to unrealized gains on our investment balances using the reduced tax rate. As required by GAAP, we recognized the net tax benefit in the provision for income taxes in our consolidated income statements, even though the deferred taxes were initially recognized in AOCI, which resulted in stranded tax effects. We elected to early adopt the standard effective April 1, 2018 and reclassified a $42 million net tax benefit from AOCI to retained earnings in our consolidated balance sheets. Adoption of the standard had no impact to our consolidated income statements or cash flows statements.
Leases
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We are also required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.
We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
The standard had a material impact in our consolidated balance sheets, but did not have an impact in our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Adoption of the standard required us to restate certain previously reported results, including the recognition of additional ROU assets and lease liabilities for operating leases. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard in our consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
64
PART II
Item 8
We elected to early adopt the standard effective July 1, 2017, using the full retrospective method, which required us to restate each prior reporting period presented. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows 10, we recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and SA, we recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard depends on contract-specific terms and in some instances may vary from recognition at the time of billing. Revenue recognition related to our hardware, cloud offerings (such as Office 365), LinkedIn, and professional services remains substantially unchanged.
Adoption of the standard using the full retrospective method required us to restate certain previously reported results, including the recognition of additional revenue and an increase in the provision for income taxes, primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard resulted in an increase in accounts receivable and other current and long-term assets, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial software subscriptions that include both distinct software licenses and SA; a reduction of unearned revenue, driven by the upfront recognition of license revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income taxes, driven by the upfront recognition of revenue. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard in our consolidated financial statements.
Impacts to Previously Reported Results
Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows:
| (In millions, except per share amounts) |
| As Previously Reported |
|
| New Revenue Standard Adjustment |
|
| As Restated |
| |||
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income Statements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| Year Ended June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 89,950 |
|
| $ | 6,621 |
|
| $ | 96,571 |
|
| Provision for income taxes |
|
| 1,945 |
|
|
| 2,467 |
|
|
| 4,412 |
|
| Net income |
|
| 21,204 |
|
|
| 4,285 |
|
|
| 25,489 |
|
| Diluted earnings per share |
|
| 2.71 |
|
|
| 0.54 |
|
|
| 3.25 |
|
|
|
| |||||||||||
| Year Ended June 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 85,320 |
|
| $ | 5,834 |
|
| $ | 91,154 |
|
| Provision for income taxes |
|
| 2,953 |
|
|
| 2,147 |
|
|
| 5,100 |
|
| Net income |
|
| 16,798 |
|
|
| 3,741 |
|
|
| 20,539 |
|
| Diluted earnings per share |
|
| 2.10 |
|
|
| 0.46 |
|
|
| 2.56 |
|
|
|
| |||||||||||
65
PART II
Item 8
| (In millions) |
| As Previously Reported |
|
| New Revenue Standard Adjustment |
|
| New Lease Standard Adjustment |
|
| As Restated |
| ||||
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable, net of allowance for doubtful accounts |
| $ | 19,792 |
|
| $ | 2,639 |
|
| $ | 0 |
|
| $ | 22,431 |
|
| Operating lease right-of-use assets |
|
| 0 |
|
|
| 0 |
|
|
| 6,555 |
|
|
| 6,555 |
|
| Other current and long-term assets |
|
| 11,147 |
|
|
| 32 |
|
|
| 0 |
|
|
| 11,179 |
|
| Unearned revenue |
|
| 44,479 |
|
|
| (17,823 | ) |
|
| 0 |
|
|
| 26,656 |
|
| Deferred income taxes |
|
| 531 |
|
|
| 5,203 |
|
|
| 0 |
|
|
| 5,734 |
|
| Operating lease liabilities |
|
| 0 |
|
|
| 0 |
|
|
| 5,372 |
|
|
| 5,372 |
|
| Other current and long-term liabilities |
|
| 23,464 |
|
|
| (26 | ) |
|
| 1,183 |
|
|
| 24,621 |
|
| Stockholders' equity |
|
| 72,394 |
|
|
| 15,317 |
|
|
| 0 |
|
|
| 87,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of the standards related to revenue recognition and leases had no impact to cash from or used in operating, financing, or investing in our consolidated cash flows statements.
Recent Accounting Guidance Not Yet Adopted
Financial Instruments – Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The standard will be effective for us beginning July 1, 2019, with early adoption permitted for any interim or annual period before the effective date. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.
Income Taxes – Intra-Entity Asset Transfers
In October 2016, the FASB issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. This guidance is effective for us beginning July 1, 2018, with early adoption permitted beginning July 1, 2017. We plan to adopt the guidance effective July 1, 2018. Adoption of the guidance will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We currently expect a net cumulative-effect adjustment of approximately $550 million, which will reverse the deferral of income tax consequences from past intra-entity transfers involving assets other than inventory and new deferred tax assets for amounts not recognized under current GAAP, partially offset by a U.S. deferred tax liability related to global intangible low-taxed income (“GILTI”). Adoption of the standard is expected to result in an increase in long-term deferred tax assets of $2.8 billion, an increase in long-term deferred tax liabilities of $2.1 billion, and a reduction to other current assets of $150 million. As a result of the TCJA, we are continuing to evaluate the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.
66
PART II
Item 8
Financial Instruments – Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than OCI. Under the standard, equity investments that do not have a readily determinable fair value are eligible for the measurement alternative. Using the measurement alternative, investments without readily determinable fair values will be valued at cost, with adjustments for changes in price or impairments reflected through net income.
The standard will be effective for us beginning July 1, 2018. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment from AOCI to retained earnings as of the effective date. A cumulative-effect adjustment will capture any previously held unrealized gains and losses held in AOCI related to our equity investments carried at fair value as well as the impact of recording the fair value of certain equity investments carried at cost. In preparation for adoption of this standard, we have implemented internal controls to align with the new standard and have concluded that we will elect the measurement alternative for equity investments that do not have readily determinable fair values.
The impact in our consolidated balance sheets upon adoption will not be material. Adoption of the standard will have no impact to cash from or used in operating, financing or investing in our consolidated cash flows statements.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as follows:
| (In millions, except earnings per share) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income available for common shareholders (A) |
| $ | 16,571 |
|
| $ | 25,489 |
|
| $ | 20,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average outstanding shares of common stock (B) |
|
| 7,700 |
|
|
| 7,746 |
|
|
| 7,925 |
|
| Dilutive effect of stock-based awards |
|
| 94 |
|
|
| 86 |
|
|
| 88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock and common stock equivalents (C) |
|
| 7,794 |
|
|
| 7,832 |
|
|
| 8,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic (A/B) |
| $ | 2.15 |
|
| $ | 3.29 |
|
| $ | 2.59 |
|
| Diluted (A/C) |
| $ | 2.13 |
|
| $ | 3.25 |
|
| $ | 2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Dividends and interest income |
| $ | 2,214 |
|
| $ | 1,387 |
|
| $ | 903 |
|
| Interest expense |
|
| (2,733 | ) |
|
| (2,222 | ) |
|
| (1,243 | ) |
| Net recognized gains on investments |
|
| 2,399 |
|
|
| 2,583 |
|
|
| 668 |
|
| Net losses on derivatives |
|
| (187 | ) |
|
| (510 | ) |
|
| (443 | ) |
| Net losses on foreign currency remeasurements |
|
| (218 | ) |
|
| (111 | ) |
|
| (129 | ) |
| Other, net |
|
| (59 | ) |
|
| (251 | ) |
|
| (195 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | 1,416 |
|
| $ | 876 |
|
| $ | (439 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
PART II
Item 8
Following are details of net recognized gains (losses) on investments during the periods reported:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Other-than-temporary impairments of investments |
| $ | (47 | ) |
| $ | (55 | ) |
| $ | (322 | ) |
| Realized gains from sales of available-for-sale securities |
|
| 3,478 |
|
|
| 3,064 |
|
|
| 1,376 |
|
| Realized losses from sales of available-for-sale securities |
|
| (1,032 | ) |
|
| (426 | ) |
|
| (386 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | 2,399 |
|
| $ | 2,583 |
|
| $ | 668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 — INVESTMENTS
Investment Components
The components of investments, including associated derivatives, were as follows:
| (In millions) |
| Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
|
| Short-term Investments |
|
| Equity and Other Investments |
| |||||||
|
|
| |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Cash |
| $ | 3,942 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 3,942 |
|
| $ | 3,942 |
|
| $ | 0 |
|
| $ | 0 |
|
| Mutual funds |
|
| 246 |
|
|
| 0 |
|
|
| 0 |
|
|
| 246 |
|
|
| 246 |
|
|
| 0 |
|
|
| 0 |
|
| Commercial paper |
|
| 2,513 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,513 |
|
|
| 2,215 |
|
|
| 298 |
|
|
| 0 |
|
| Certificates of deposit |
|
| 2,058 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,058 |
|
|
| 1,865 |
|
|
| 193 |
|
|
| 0 |
|
| U.S. government and agency securities |
|
| 109,862 |
|
|
| 62 |
|
|
| (1,167 | ) |
|
| 108,757 |
|
|
| 3,678 |
|
|
| 105,079 |
|
|
| 0 |
|
| Foreign government bonds |
|
| 5,182 |
|
|
| 1 |
|
|
| (10 | ) |
|
| 5,173 |
|
|
| 0 |
|
|
| 5,173 |
|
|
| 0 |
|
| Mortgage- and asset-backed securities |
|
| 3,868 |
|
|
| 4 |
|
|
| (13 | ) |
|
| 3,859 |
|
|
| 0 |
|
|
| 3,859 |
|
|
| 0 |
|
| Corporate notes and bonds |
|
| 6,947 |
|
|
| 21 |
|
|
| (56 | ) |
|
| 6,912 |
|
|
| 0 |
|
|
| 6,912 |
|
|
| 0 |
|
| Municipal securities |
|
| 271 |
|
|
| 37 |
|
|
| (1 | ) |
|
| 307 |
|
|
| 0 |
|
|
| 307 |
|
|
| 0 |
|
| Common and preferred stock |
|
| 1,220 |
|
|
| 95 |
|
|
| (10 | ) |
|
| 1,305 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,305 |
|
| Other investments |
|
| 558 |
|
|
| 0 |
|
|
| 0 |
|
|
| 558 |
|
|
| 0 |
|
|
| 1 |
|
|
| 557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 136,667 |
|
| $ | 220 |
|
| $ | (1,257 | ) |
| $ | 135,630 |
|
| $ | 11,946 |
|
| $ | 121,822 |
|
| $ | 1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
| Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
|
| Short-term Investments |
|
| Equity and Other Investments |
| |||||||
|
|
| |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Cash |
| $ | 3,624 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 3,624 |
|
| $ | 3,624 |
|
| $ | 0 |
|
| $ | 0 |
|
| Mutual funds |
|
| 1,478 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,478 |
|
|
| 1,478 |
|
|
| 0 |
|
|
| 0 |
|
| Commercial paper |
|
| 319 |
|
|
| 0 |
|
|
| 0 |
|
|
| 319 |
|
|
| 69 |
|
|
| 250 |
|
|
| 0 |
|
| Certificates of deposit |
|
| 1,358 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,358 |
|
|
| 972 |
|
|
| 386 |
|
|
| 0 |
|
| U.S. government and agency securities |
|
| 112,119 |
|
|
| 85 |
|
|
| (360 | ) |
|
| 111,844 |
|
|
| 16 |
|
|
| 111,828 |
|
|
| 0 |
|
| Foreign government bonds |
|
| 5,276 |
|
|
| 2 |
|
|
| (13 | ) |
|
| 5,265 |
|
|
| 1,504 |
|
|
| 3,761 |
|
|
| 0 |
|
| Mortgage- and asset-backed securities |
|
| 3,921 |
|
|
| 14 |
|
|
| (4 | ) |
|
| 3,931 |
|
|
| 0 |
|
|
| 3,931 |
|
|
| 0 |
|
| Corporate notes and bonds |
|
| 4,786 |
|
|
| 61 |
|
|
| (12 | ) |
|
| 4,835 |
|
|
| 0 |
|
|
| 4,835 |
|
|
| 0 |
|
| Municipal securities |
|
| 284 |
|
|
| 43 |
|
|
| 0 |
|
|
| 327 |
|
|
| 0 |
|
|
| 327 |
|
|
| 0 |
|
| Common and preferred stock |
|
| 2,472 |
|
|
| 3,062 |
|
|
| (34 | ) |
|
| 5,500 |
|
|
| 0 |
|
|
| 0 |
|
|
| 5,500 |
|
| Other investments |
|
| 523 |
|
|
| 0 |
|
|
| 0 |
|
|
| 523 |
|
|
| 0 |
|
|
| 0 |
|
|
| 523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 136,160 |
|
| $ | 3,267 |
|
| $ | (423 | ) |
| $ | 139,004 |
|
| $ | 7,663 |
|
| $ | 125,318 |
|
| $ | 6,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
PART II
Item 8
As of June 30, 2018 and 2017, the recorded bases of common and preferred stock that are restricted for more than one year or are not publicly traded were $999 million and $1.1 billion, respectively. These investments are carried at cost and are reviewed quarterly for indicators of other-than-temporary impairment. It is not practicable for us to reliably estimate the fair value of these investments.
As of June 30, 2018 and 2017, collateral received under agreements for loaned securities was $1.8 billion and $3.7 billion, respectively, and primarily comprised U.S. government and agency securities.
Unrealized Losses on Investments
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized |
|
| Fair Value |
|
| Unrealized |
|
| Total |
|
| ||||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| U.S. government and agency securities |
| $ | 82,352 |
|
| $ | (1,064 | ) |
| $ | 4,459 |
|
| $ | (103 | ) |
| $ | 86,811 |
|
| $ | (1,167 | ) |
| Foreign government bonds |
|
| 3,457 |
|
|
| (7 | ) |
|
| 13 |
|
|
| (3 | ) |
|
| 3,470 |
|
|
| (10 | ) |
| Mortgage- and asset-backed securities |
|
| 2,072 |
|
|
| (9 | ) |
|
| 96 |
|
|
| (4 | ) |
|
| 2,168 |
|
|
| (13 | ) |
| Corporate notes and bonds |
|
| 3,111 |
|
|
| (43 | ) |
|
| 301 |
|
|
| (13 | ) |
|
| 3,412 |
|
|
| (56 | ) |
| Municipal securities |
|
| 45 |
|
|
| (1 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 45 |
|
|
| (1 | ) |
| Common and preferred stock |
|
| 75 |
|
|
| (6 | ) |
|
| 8 |
|
|
| (4 | ) |
|
| 83 |
|
|
| (10 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 91,112 |
|
| $ | (1,130 | ) |
| $ | 4,877 |
|
| $ | (127 | ) |
| $ | 95,989 |
|
| $ | (1,257 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized |
|
| Fair Value |
|
| Unrealized |
|
| Total |
|
| ||||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| U.S. government and agency securities |
| $ | 87,558 |
|
| $ | (348 | ) |
| $ | 371 |
|
| $ | (12 | ) |
| $ | 87,929 |
|
| $ | (360 | ) |
| Foreign government bonds |
|
| 4,006 |
|
|
| (2 | ) |
|
| 23 |
|
|
| (11 | ) |
|
| 4,029 |
|
|
| (13 | ) |
| Mortgage- and asset-backed securities |
|
| 1,068 |
|
|
| (3 | ) |
|
| 198 |
|
|
| (1 | ) |
|
| 1,266 |
|
|
| (4 | ) |
| Corporate notes and bonds |
|
| 669 |
|
|
| (8 | ) |
|
| 177 |
|
|
| (4 | ) |
|
| 846 |
|
|
| (12 | ) |
| Common and preferred stock |
|
| 69 |
|
|
| (6 | ) |
|
| 148 |
|
|
| (28 | ) |
|
| 217 |
|
|
| (34 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 93,370 |
|
| $ | (367 | ) |
| $ | 917 |
|
| $ | (56 | ) |
| $ | 94,287 |
|
| $ | (423 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses from domestic and international equities are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.
Debt Investment Maturities
| (In millions) |
| Cost Basis |
|
| Estimated Fair Value |
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Due in one year or less |
| $ | 31,590 |
|
| $ | 31,451 |
|
| Due after one year through five years |
|
| 76,422 |
|
|
| 75,810 |
|
| Due after five years through 10 years |
|
| 21,765 |
|
|
| 21,396 |
|
| Due after 10 years |
|
| 924 |
|
|
| 922 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 130,701 |
|
| $ | 129,579 |
|
|
|
|
|
|
|
|
|
|
|
69
PART II
Item 8
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible.
Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. All notional amounts presented below are measured in U.S. dollar equivalents.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and Australian dollar. As of June 30, 2018 and 2017, the total notional amounts of these foreign exchange contracts sold were $6.1 billion and $8.9 billion, respectively.
Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. As of June 30, 2018 and 2017, the total notional amounts of these foreign exchange contracts sold were $5.0 billion and $5.1 billion, respectively.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures. As of June 30, 2018, the total notional amounts of these foreign exchange contracts purchased and sold were $9.4 billion and $13.4 billion, respectively. As of June 30, 2017, the total notional amounts of these foreign exchange contracts purchased and sold were $8.8 billion and $10.6 billion, respectively.
Equity
Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may use and designate equity derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of June 30, 2018, the total notional amounts of equity contracts purchased and sold for managing market price risk were $49 million and $5 million, respectively. As of June 30, 2017, the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.9 billion and $2.4 billion, respectively, of which $1.6 billion and $1.8 billion, respectively, were designated as hedging instruments.
Interest Rate
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts, and over-the-counter swap and option contracts, none of which are designated as hedging instruments. As of June 30, 2018, the total notional amounts of fixed-interest rate contracts purchased and sold were $306 million and $390 million, respectively. As of June 30, 2017, the total notional amounts of fixed-interest rate contracts purchased and sold were $233 million and $352 million, respectively.
In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest available delivery date. As of June 30, 2018 and 2017, the total notional derivative amounts of mortgage contracts purchased were $568 million and $567 million, respectively.
70
PART II
Item 8
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low-cost method of managing exposure to individual credit risks or groups of credit risks. As of June 30, 2018, the total notional amounts of credit contracts purchased and sold were $4 million and $82 million, respectively. As of June 30, 2017, the total notional amounts of credit contracts purchased and sold were $267 million and $63 million, respectively.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2018, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.
Fair Values of Derivative Instruments
The following table presents the fair values of derivative instruments designated as hedging instruments (“designated hedge derivatives”) and not designated as hedging instruments (“non-designated hedge derivatives”). The fair values exclude the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk:
|
|
|
| Assets |
|
|
| Liabilities |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| (In millions) |
| Short-term |
| Other |
| Equity and |
| Other Long-term Assets |
| Other |
| Other Long-term Liabilities |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-designated Hedge Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | 10 |
|
| $ | 221 |
|
| $ | 0 |
|
| $ | 25 |
|
| $ | (193 | ) |
| $ | (4 | ) |
| Equity contracts |
|
| 2 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (7 | ) |
|
| 0 |
|
| Interest rate contracts |
|
| 11 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (2 | ) |
|
| 0 |
|
| Credit contracts |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 23 |
|
| $ | 221 |
|
| $ | 0 |
|
| $ | 25 |
|
| $ | (203 | ) |
| $ | (4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated Hedge Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | 95 |
|
| $ | 174 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| Equity contracts |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 95 |
|
| $ | 174 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total gross amounts of derivatives |
| $ | 118 |
|
| $ | 395 |
|
| $ | 0 |
|
| $ | 25 |
|
| $ | (203 | ) |
| $ | (4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross derivatives either offset or subject to an enforceable master netting agreement |
| $ | 113 |
|
| $ | 395 |
|
| $ | 0 |
|
| $ | 25 |
|
| $ | (203 | ) |
| $ | (4 | ) |
| Gross amounts of derivatives offset on the balance sheet |
|
| (14 | ) |
|
| (135 | ) |
|
| 0 |
|
|
| (3 | ) |
|
| 150 |
|
|
| 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amounts presented on the balance sheet |
|
| 99 |
|
|
| 260 |
|
|
| 0 |
|
|
| 22 |
|
|
| (53 | ) |
|
| (1 | ) |
| Gross amounts of derivatives not offset on the balance sheet |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
| Cash collateral received |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (235 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amount |
| $ | 99 |
|
| $ | 260 |
|
| $ | 0 |
|
| $ | 22 |
|
| $ | (288 | ) |
| $ | (1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
PART II
Item 8
|
|
| Assets |
| Liabilities |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| (In millions) |
| Short-term |
| Other |
| Equity and |
| Other Long-term Assets |
| Other |
| Other Long-term Liabilities |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-designated Hedge Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | 9 |
|
| $ | 203 |
|
| $ | 0 |
|
| $ | 6 |
|
| $ | (134 | ) |
| $ | (8 | ) |
| Equity contracts |
|
| 3 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (6 | ) |
|
| 0 |
|
| Interest rate contracts |
|
| 3 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (7 | ) |
|
| 0 |
|
| Credit contracts |
|
| 5 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 20 |
|
| $ | 203 |
|
| $ | 0 |
|
| $ | 6 |
|
| $ | (148 | ) |
| $ | (8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated Hedge Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | 80 |
|
| $ | 133 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | (3 | ) |
| $ | 0 |
|
| Equity contracts |
|
| 0 |
|
|
| 0 |
|
|
| 67 |
|
|
| 0 |
|
|
| (186 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 80 |
|
| $ | 133 |
|
| $ | 67 |
|
| $ | 0 |
|
| $ | (189 | ) |
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total gross amounts of derivatives |
| $ | 100 |
|
| $ | 336 |
|
| $ | 67 |
|
| $ | 6 |
|
| $ | (337 | ) |
| $ | (8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross derivatives either offset or subject to an enforceable master netting agreement |
| $ | 100 |
|
| $ | 336 |
|
| $ | 67 |
|
| $ | 6 |
|
| $ | (334 | ) |
| $ | (8 | ) |
| Gross amounts of derivatives offset on the balance sheet |
|
| (20 | ) |
|
| (132 | ) |
|
| (67 | ) |
|
| (8 | ) |
|
| 221 |
|
|
| 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amounts presented on the balance sheet |
|
| 80 |
|
|
| 204 |
|
|
| 0 |
|
|
| (2 | ) |
|
| (113 | ) |
|
| (1 | ) |
| Gross amounts of derivatives not offset on the balance sheet |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
| Cash collateral received |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (228 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amount |
| $ | 80 |
|
| $ | 204 |
|
| $ | 0 |
|
| $ | (2 | ) |
| $ | (341 | ) |
| $ | (1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 4 – Investments and Note 6 – Fair Value Measurements for further information.
Fair Value Hedge Gains (Losses)
We recognized in other income (expense), net the following gains (losses) on contracts designated as fair value hedges and their related hedged items:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Foreign Exchange Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Derivatives |
| $ | 25 |
|
| $ | 441 |
|
| $ | (797 | ) |
| Hedged items |
|
| 78 |
|
|
| (386 | ) |
|
| 838 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total amount of ineffectiveness |
| $ | 103 |
|
| $ | 55 |
|
| $ | 41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Equity Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Derivatives |
| $ | (324 | ) |
| $ | (74 | ) |
| $ | (76 | ) |
| Hedged items |
|
| 324 |
|
|
| 74 |
|
|
| 76 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total amount of ineffectiveness |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of equity contracts excluded from effectiveness assessment |
| $ | 80 |
|
| $ | (80 | ) |
| $ | (10 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
72
PART II
Item 8
Cash Flow Hedge Gains (Losses)
We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
| ||||||||||
|
|
|
|
|
|
| |||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Effective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Gains recognized in other comprehensive income (net of tax of $11, $4, and $24) |
| $ | 219 |
|
| $ | 328 |
|
| $ | 351 |
|
| Gains reclassified from accumulated other comprehensive income (loss) into revenue |
|
| 185 |
|
|
| 555 |
|
|
| 625 |
|
|
|
|
|
| |||||||||
| Amount Excluded from Effectiveness Assessment and Ineffective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Losses recognized in other income (expense), net |
|
| (255 | ) |
|
| (389 | ) |
|
| (354 | ) |
|
|
| |||||||||||
We estimate that $179 million of net derivative gains included in AOCI as of June 30, 2018 will be reclassified into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during fiscal year 2018.
Non-designated Derivative Gains (Losses)
Gains (losses) from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income (expense), net. These amounts are shown in the table below, with the exception of gains (losses) on derivatives presented in income statement line items other than other income (expense), net, which were immaterial for the periods presented.
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Foreign exchange contracts |
| $ | (33 | ) |
| $ | (117 | ) |
| $ | (55 | ) |
| Equity contracts |
|
| (87 | ) |
|
| (114 | ) |
|
| (21 | ) |
| Interest rate contracts |
|
| (15 | ) |
|
| 14 |
|
|
| 10 |
|
| Credit contracts |
|
| (2 | ) |
|
| 5 |
|
|
| (1 | ) |
| Other contracts |
|
| 0 |
|
|
| (22 | ) |
|
| (87 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | (137 | ) |
| $ | (234 | ) |
| $ | (154 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
PART II
Item 8
NOTE 6 — FAIR VALUE MEASUREMENTS
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:
| (In millions) |
|
| Level 1 |
|
|
| Level 2 |
|
|
| Level 3 |
|
|
| Gross Fair Value |
|
|
| Netting | (a) |
|
| Net Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mutual funds |
| $ | 246 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 246 |
|
| $ | 0 |
|
| $ | 246 |
|
| Commercial paper |
|
| 0 |
|
|
| 2,513 |
|
|
| 0 |
|
|
| 2,513 |
|
|
| 0 |
|
|
| 2,513 |
|
| Certificates of deposit |
|
| 0 |
|
|
| 2,058 |
|
|
| 0 |
|
|
| 2,058 |
|
|
| 0 |
|
|
| 2,058 |
|
| U.S. government and agency securities |
|
| 107,015 |
|
|
| 1,742 |
|
|
| 0 |
|
|
| 108,757 |
|
|
| 0 |
|
|
| 108,757 |
|
| Foreign government bonds |
|
| 22 |
|
|
| 5,054 |
|
|
| 0 |
|
|
| 5,076 |
|
|
| 0 |
|
|
| 5,076 |
|
| Mortgage- and asset-backed securities |
|
| 0 |
|
|
| 3,855 |
|
|
| 0 |
|
|
| 3,855 |
|
|
| 0 |
|
|
| 3,855 |
|
| Corporate notes and bonds |
|
| 0 |
|
|
| 6,894 |
|
|
| 15 |
|
|
| 6,909 |
|
|
| 0 |
|
|
| 6,909 |
|
| Municipal securities |
|
| 0 |
|
|
| 307 |
|
|
| 0 |
|
|
| 307 |
|
|
| 0 |
|
|
| 307 |
|
| Common and preferred stock |
|
| 287 |
|
|
| 0 |
|
|
| 18 |
|
|
| 305 |
|
|
| 0 |
|
|
| 305 |
|
| Derivatives |
|
| 1 |
|
|
| 535 |
|
|
| 2 |
|
|
| 538 |
|
|
| (152 | ) |
|
| 386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 107,571 |
|
| $ | 22,958 |
|
| $ | 35 |
|
| $ | 130,564 |
|
| $ | (152 | ) |
| $ | 130,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives and other |
| $ | 1 |
|
| $ | 206 |
|
| $ | 0 |
|
| $ | 207 |
|
| $ | (153 | ) |
| $ | 54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
| Level 1 |
|
|
| Level 2 |
|
|
| Level 3 |
|
|
| Gross Fair Value |
|
|
| Netting | (a) |
|
| Net Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mutual funds |
| $ | 1,478 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 1,478 |
|
| $ | 0 |
|
| $ | 1,478 |
|
| Commercial paper |
|
| 0 |
|
|
| 319 |
|
|
| 0 |
|
|
| 319 |
|
|
| 0 |
|
|
| 319 |
|
| Certificates of deposit |
|
| 0 |
|
|
| 1,358 |
|
|
| 0 |
|
|
| 1,358 |
|
|
| 0 |
|
|
| 1,358 |
|
| U.S. government and agency securities |
|
| 109,228 |
|
|
| 2,616 |
|
|
| 0 |
|
|
| 111,844 |
|
|
| 0 |
|
|
| 111,844 |
|
| Foreign government bonds |
|
| 0 |
|
|
| 5,187 |
|
|
| 0 |
|
|
| 5,187 |
|
|
| 0 |
|
|
| 5,187 |
|
| Mortgage- and asset-backed securities |
|
| 0 |
|
|
| 3,934 |
|
|
| 0 |
|
|
| 3,934 |
|
|
| 0 |
|
|
| 3,934 |
|
| Corporate notes and bonds |
|
| 0 |
|
|
| 4,829 |
|
|
| 1 |
|
|
| 4,830 |
|
|
| 0 |
|
|
| 4,830 |
|
| Municipal securities |
|
| 0 |
|
|
| 327 |
|
|
| 0 |
|
|
| 327 |
|
|
| 0 |
|
|
| 327 |
|
| Common and preferred stock |
|
| 2,414 |
|
|
| 1,994 |
|
|
| 18 |
|
|
| 4,426 |
|
|
| 0 |
|
|
| 4,426 |
|
| Derivatives |
|
| 1 |
|
|
| 508 |
|
|
| 0 |
|
|
| 509 |
|
|
| (227 | ) |
|
| 282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 113,121 |
|
| $ | 21,072 |
|
| $ | 19 |
|
| $ | 134,212 |
|
| $ | (227 | ) |
| $ | 133,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives and other |
| $ | 0 |
|
| $ | 345 |
|
| $ | 39 |
|
| $ | 384 |
|
| $ | (228 | ) |
| $ | 156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk. |
The changes in our Level 3 financial instruments that are measured at fair value on a recurring basis were immaterial during the periods presented.
74
PART II
Item 8
The following table reconciles the total “Net Fair Value” of assets above to the balance sheet presentation of these same assets in Note 4 – Investments.
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
|
| 2018 |
|
|
| 2017 |
|
|
|
|
|
|
|
|
|
|
|
| Net fair value of assets measured at fair value on a recurring basis |
| $ | 130,412 |
|
| $ | 133,985 |
|
| Cash |
|
| 3,942 |
|
|
| 3,624 |
|
| Common and preferred stock measured at fair value on a nonrecurring basis |
|
| 999 |
|
|
| 1,073 |
|
| Other investments measured at fair value on a nonrecurring basis |
|
| 557 |
|
|
| 523 |
|
| Less derivative net assets classified as other current and long-term assets |
|
| (282 | ) |
|
| (202 | ) |
| Other |
|
| 2 |
|
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recorded basis of investment components |
| $ | 135,630 |
|
| $ | 139,004 |
|
|
|
|
|
|
|
|
|
|
|
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During fiscal year 2018 and 2017, we did not record any material other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.
NOTE 7 — INVENTORIES
The components of inventories were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2018 |
|
| 2017 |
| ||
|
|
|
| ||||||
| Raw materials |
| $ | 655 |
|
| $ | 797 |
|
| Work in process |
|
| 54 |
|
|
| 145 |
|
| Finished goods |
|
| 1,953 |
|
|
| 1,239 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | 2,662 |
|
| $ | 2,181 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2018 |
|
| 2017 |
| ||
|
|
|
| ||||||
| Land |
| $ | 1,254 |
|
| $ | 1,107 |
|
| Buildings and improvements |
|
| 20,604 |
|
|
| 16,284 |
|
| Leasehold improvements |
|
| 4,735 |
|
|
| 5,064 |
|
| Computer equipment and software |
|
| 27,633 |
|
|
| 21,414 |
|
| Furniture and equipment |
|
| 4,457 |
|
|
| 4,044 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, at cost |
|
| 58,683 |
|
|
| 47,913 |
|
| Accumulated depreciation |
|
| (29,223 | ) |
|
| (24,179 | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, net |
| $ | 29,460 |
|
| $ | 23,734 |
|
|
|
|
|
|
|
|
|
|
|
During fiscal years 2018, 2017, and 2016, depreciation expense was $7.7 billion, $6.1 billion, and $4.9 billion, respectively. We have committed $1.9 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2018.
75
PART II
Item 8
NOTE 9 — BUSINESS COMBINATIONS
LinkedIn Corporation
On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn Corporation, the world’s largest professional network on the Internet, for a total purchase price of $27.0 billion. The purchase price consisted primarily of cash of $26.9 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics 365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the acquisition.
The allocation of the purchase price to goodwill was completed as of June 30, 2017.
The major classes of assets and liabilities to which we allocated the purchase price were as follows:
| (In millions) |
| |||
|
|
|
| ||
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 1,328 |
|
| Short-term investments |
|
| 2,110 |
|
| Other current assets |
|
| 697 |
|
| Property and equipment |
|
| 1,529 |
|
| Intangible assets |
|
| 7,887 |
|
| Goodwill (a) |
|
| 16,803 |
|
| Short-term debt (b) |
|
| (1,323 | ) |
| Other current liabilities |
|
| (1,117 | ) |
| Deferred income taxes |
|
| (774 | ) |
| Other |
|
| (131 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total purchase price |
| $ | 27,009 |
|
|
|
|
|
|
|
| (a) | Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes. |
| (b) | Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt in our consolidated balance sheets. Refer to Note 12 – Debt for further information. |
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions) |
| Amount |
|
| Weighted Average Life |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Customer-related |
| $ | 3,607 |
|
|
| 7 years |
|
| Marketing-related (trade names) |
|
| 2,148 |
|
|
| 20 years |
|
| Technology-based |
|
| 2,109 |
|
|
| 3 years |
|
| Contract-based |
|
| 23 |
|
|
| 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value of intangible assets acquired |
| $ | 7,887 |
|
|
| 9 years |
|
|
|
|
|
|
|
|
|
| |
Our consolidated income statements include the following revenue and operating loss attributable to LinkedIn since the date of acquisition:
| (In millions) |
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
| |
| Year Ended June 30, |
|
|
| 2017 |
|
|
|
|
|
|
|
|
| Revenue |
|
| $ | 2,271 |
|
| Operating loss |
|
|
| (924 | ) |
|
|
|
|
|
| |
76
PART II
Item 8
Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2015:
| (In millions, except earnings per share) |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended June 30, |
|
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 98,291 |
|
| $ | 94,490 |
|
| Net income |
|
| 25,179 |
|
|
| 19,128 |
|
| Diluted earnings per share |
|
| 3.21 |
|
|
| 2.38 |
|
|
|
|
|
|
|
|
|
|
|
These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented.
GitHub Inc.
On June 4, 2018, we entered into a definitive agreement to acquire GitHub Inc. (“GitHub”) for $7.5 billion in an all-stock transaction. We expect the acquisition will close by the end of the calendar year, subject to approval by GitHub’s shareholders, satisfaction of certain regulatory approvals, and other customary closing conditions. GitHub will be included in our consolidated results of operations as of the date of acquisition.
Other
During fiscal year 2018, we completed nine acquisitions for total consideration of $948 million, substantially all of which was paid in cash. These entities have been included in our consolidated results of operations since their respective acquisition dates. Pro forma results of operations for these acquisitions have not been presented because the effects of these business combinations, individually and in aggregate, were not material to our consolidated results of operations.
NOTE 10 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) |
| June 30, 2016 |
| Acquisitions |
| Other |
| June 30, 2017 |
| Acquisitions |
| Other |
| June 30, |
| ||||||||||||||
|
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
| Productivity and Business Processes |
|
| $ | 6,678 |
|
| $ | 17,072 | (a) |
| $ | (11 | ) |
| $ | 23,739 |
|
| $ | 72 |
|
| $ | 12 |
|
| $ | 23,823 |
|
| Intelligent Cloud |
|
|
| 5,467 |
|
|
| 49 |
|
|
| 39 |
|
|
| 5,555 |
|
|
| 164 |
|
|
| (16 | ) |
|
| 5,703 |
|
| More Personal Computing |
|
|
| 5,727 |
|
|
| 115 |
|
|
| (14 | ) |
|
| 5,828 |
|
|
| 394 |
|
|
| (65 | ) |
|
| 6,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
| $ | 17,872 |
|
| $ | 17,236 |
|
| $ | 14 |
|
| $ | 35,122 |
|
| $ | 630 |
|
| $ | (69 | ) |
| $ | 35,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes goodwill related to LinkedIn and other acquisitions. Refer to Note 9 – Business Combinations for further information. |
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the above table. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
As of June 30, 2018 and 2017, accumulated goodwill impairment was $11.3 billion.
77
PART II
Item 8
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
No instances of impairment were identified in our May 1, 2018, May 1, 2017, or May 1, 2016 tests.
NOTE 11 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
| (In millions) |
| Gross |
|
| Accumulated |
|
| Net Carrying |
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, |
|
|
|
|
|
|
| 2018 |
|
|
|
|
|
|
|
| 2017 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Technology-based |
| $ | 7,220 |
|
| $ | (5,018 | ) |
| $ | 2,202 |
|
| $ | 7,765 |
|
| $ | (4,318 | ) |
| $ | 3,447 |
|
| Customer-related |
|
| 4,031 |
|
|
| (1,205 | ) |
|
| 2,826 |
|
|
| 4,045 |
|
|
| (692 | ) |
|
| 3,353 |
|
| Marketing-related |
|
| 4,006 |
|
|
| (1,071 | ) |
|
| 2,935 |
|
|
| 4,016 |
|
|
| (829 | ) |
|
| 3,187 |
|
| Contract-based |
|
| 679 |
|
|
| (589 | ) |
|
| 90 |
|
|
| 841 |
|
|
| (722 | ) |
|
| 119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 15,936 |
|
| $ | (7,883 | ) |
| $ | 8,053 |
|
| $ | 16,667 |
|
| $ | (6,561 | ) |
| $ | 10,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No material impairments of intangible assets were identified during fiscal year 2018 or 2017.
During fiscal year 2016, we recorded impairment charges of $480 million related to intangible assets in the Devices reporting unit within our More Personal Computing segment. In the fourth quarter of fiscal year 2016, we tested these intangible assets for recoverability due to changes in facts and circumstances associated with the shift in strategic direction and reduced profitability expectations for our Phone business. Based on the results of our testing, we determined that the carrying value of the intangible assets was not recoverable, and an impairment charge was recorded to the extent that estimated fair value exceeded carrying value. We primarily used the income approach to determine the fair value of the intangible assets and determine the amount of impairment.
These intangible assets impairment charges were included in impairment and restructuring expenses in our consolidated income statement and reflected in Corporate and Other in our table of operating income (loss) by segment in Note 21 – Segment Information and Geographic Data.
We estimate that we have no significant residual value related to our intangible assets.
The components of intangible assets acquired during the periods presented were as follows:
| (In millions) |
| Amount |
|
| Weighted Average Life |
|
| Amount |
|
| Weighted Average Life |
| ||||
|
|
| |||||||||||||||
|
|
|
|
|
|
| |||||||||||
| Year Ended June 30, |
| 2018 |
|
|
|
|
| 2017 |
|
|
|
| ||||
|
|
|
|
|
| ||||||||||||
| Technology-based |
| $ | 178 |
|
|
| 4 years |
|
| $ | 2,265 |
|
|
| 2 years |
|
| Marketing-related |
|
| 14 |
|
|
| 5 years |
|
|
| 2,148 |
|
|
| 19 years |
|
| Contract-based |
|
| 14 |
|
|
| 4 years |
|
|
| 63 |
|
|
| 6 years |
|
| Customer-related |
|
| 13 |
|
|
| 5 years |
|
|
| 3,607 |
|
|
| 7 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 219 |
|
|
| 5 years |
|
| $ | 8,083 |
|
|
| 9 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $2.2 billion, $1.7 billion, and $978 million for fiscal years 2018, 2017, and 2016, respectively. Amortization of capitalized software was $54 million, $55 million, and $69 million for fiscal years 2018, 2017, and 2016, respectively.
78
PART II
Item 8
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2018:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2019 |
| $ | 1,785 |
|
| 2020 |
|
| 1,260 |
|
| 2021 |
|
| 1,043 |
|
| 2022 |
|
| 949 |
|
| 2023 |
|
| 806 |
|
| Thereafter |
|
| 2,210 |
|
|
|
| |||
|
|
|
|
|
|
| Total |
| $ | 8,053 |
|
|
|
|
|
|
|
NOTE 12 — DEBT
Short-term Debt
As of June 30, 2018, we had no commercial paper issued and outstanding. As of June 30, 2017, we had $9.1 billion of commercial paper issued and outstanding, with a weighted average interest rate of 1.01% and maturities ranging from 25 days to 264 days. The estimated fair value of this commercial paper approximates its carrying value.
We have two $5.0 billion credit facilities that expire on October 30, 2018 and October 31, 2022, respectively. These credit facilities serve as a back-up for our commercial paper program. As of June 30, 2018, we were in compliance with the only financial covenant in both credit agreements, which requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as defined in the credit agreements. No amounts were drawn against these credit facilities during any of the periods presented.
Long-term Debt
As of June 30, 2018, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $76.2 billion and $77.5 billion, respectively. As of June 30, 2017, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $77.1 billion and $80.3 billion, respectively. These estimated fair values are based on Level 2 inputs.
79
PART II
Item 8
The components of our long-term debt, including the current portion, and the associated interest rates were as follows:
| (In millions, except interest rates) |
| Face Value June 30, 2018 |
|
| Face Value June 30, 2017 |
|
|
| Stated Interest Rate |
|
|
| Effective Interest Rate |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 15, 2017 |
| $ | 0 |
|
| $ | 600 |
|
|
| 0.875% |
|
|
| 1.084% |
|
| May 1, 2018 |
|
| 0 |
|
|
| 450 |
|
|
| 1.000% |
|
|
| 1.106% |
|
| November 3, 2018 |
|
| 1,750 |
|
|
| 1,750 |
|
|
| 1.300% |
|
|
| 1.396% |
|
| December 6, 2018 |
|
| 1,250 |
|
|
| 1,250 |
|
|
| 1.625% |
|
|
| 1.824% |
|
| June 1, 2019 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 4.200% |
|
|
| 4.379% |
|
| August 8, 2019 |
|
| 2,500 |
|
|
| 2,500 |
|
|
| 1.100% |
|
|
| 1.203% |
|
| November 1, 2019 |
|
| 18 |
|
|
| 18 |
|
|
| 0.500% |
|
|
| 0.500% |
|
| February 6, 2020 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 1.850% |
|
|
| 1.952% |
|
| February 12, 2020 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 1.850% |
|
|
| 1.935% |
|
| October 1, 2020 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 3.000% |
|
|
| 3.137% |
|
| November 3, 2020 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 2.000% |
|
|
| 2.093% |
|
| February 8, 2021 |
|
| 500 |
|
|
| 500 |
|
|
| 4.000% |
|
|
| 4.082% |
|
| August 8, 2021 |
|
| 2,750 |
|
|
| 2,750 |
|
|
| 1.550% |
|
|
| 1.642% |
|
| December 6, 2021 (a) |
|
| 2,044 |
|
|
| 1,996 |
|
|
| 2.125% |
|
|
| 2.233% |
|
| February 6, 2022 |
|
| 1,750 |
|
|
| 1,750 |
|
|
| 2.400% |
|
|
| 2.520% |
|
| February 12, 2022 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 2.375% |
|
|
| 2.466% |
|
| November 3, 2022 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 2.650% |
|
|
| 2.717% |
|
| November 15, 2022 |
|
| 750 |
|
|
| 750 |
|
|
| 2.125% |
|
|
| 2.239% |
|
| May 1, 2023 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 2.375% |
|
|
| 2.465% |
|
| August 8, 2023 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 2.000% |
|
|
| 2.101% |
|
| December 15, 2023 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 3.625% |
|
|
| 3.726% |
|
| February 6, 2024 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 2.875% |
|
|
| 3.041% |
|
| February 12, 2025 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 2.700% |
|
|
| 2.772% |
|
| November 3, 2025 |
|
| 3,000 |
|
|
| 3,000 |
|
|
| 3.125% |
|
|
| 3.176% |
|
| August 8, 2026 |
|
| 4,000 |
|
|
| 4,000 |
|
|
| 2.400% |
|
|
| 2.464% |
|
| February 6, 2027 |
|
| 4,000 |
|
|
| 4,000 |
|
|
| 3.300% |
|
|
| 3.383% |
|
| December 6, 2028 (a) |
|
| 2,044 |
|
|
| 1,996 |
|
|
| 3.125% |
|
|
| 3.218% |
|
| May 2, 2033 (a) |
|
| 642 |
|
|
| 627 |
|
|
| 2.625% |
|
|
| 2.690% |
|
| February 12, 2035 |
|
| 1,500 |
|
|
| 1,500 |
|
|
| 3.500% |
|
|
| 3.604% |
|
| November 3, 2035 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 4.200% |
|
|
| 4.260% |
|
| August 8, 2036 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 3.450% |
|
|
| 3.510% |
|
| February 6, 2037 |
|
| 2,500 |
|
|
| 2,500 |
|
|
| 4.100% |
|
|
| 4.152% |
|
| June 1, 2039 |
|
| 750 |
|
|
| 750 |
|
|
| 5.200% |
|
|
| 5.240% |
|
| October 1, 2040 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 4.500% |
|
|
| 4.567% |
|
| February 8, 2041 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 5.300% |
|
|
| 5.361% |
|
| November 15, 2042 |
|
| 900 |
|
|
| 900 |
|
|
| 3.500% |
|
|
| 3.571% |
|
| May 1, 2043 |
|
| 500 |
|
|
| 500 |
|
|
| 3.750% |
|
|
| 3.829% |
|
| December 15, 2043 |
|
| 500 |
|
|
| 500 |
|
|
| 4.875% |
|
|
| 4.918% |
|
| February 12, 2045 |
|
| 1,750 |
|
|
| 1,750 |
|
|
| 3.750% |
|
|
| 3.800% |
|
| November 3, 2045 |
|
| 3,000 |
|
|
| 3,000 |
|
|
| 4.450% |
|
|
| 4.492% |
|
| August 8, 2046 |
|
| 4,500 |
|
|
| 4,500 |
|
|
| 3.700% |
|
|
| 3.743% |
|
| February 6, 2047 |
|
| 3,000 |
|
|
| 3,000 |
|
|
| 4.250% |
|
|
| 4.287% |
|
| February 12, 2055 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 4.000% |
|
|
| 4.063% |
|
| November 3, 2055 |
|
| 1,000 |
|
|
| 1,000 |
|
|
| 4.750% |
|
|
| 4.782% |
|
| August 8, 2056 |
|
| 2,250 |
|
|
| 2,250 |
|
|
| 3.950% |
|
|
| 4.033% |
|
| February 6, 2057 |
|
| 2,000 |
|
|
| 2,000 |
|
|
| 4.500% |
|
|
| 4.528% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 76,898 |
|
| $ | 77,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Euro-denominated debt securities. |
80
PART II
Item 8
The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. Cash paid for interest on our debt for fiscal years 2018, 2017, and 2016 was $2.4 billion, $1.6 billion, and $1.1 billion, respectively. As of June 30, 2018 and 2017, the aggregate debt issuance costs and unamortized discount associated with our long-term debt, including the current portion, were $658 million and $715 million, respectively.
Maturities of our long-term debt for each of the next five years and thereafter are as follows:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2019 |
| $ | 4,000 |
|
| 2020 |
|
| 5,518 |
|
| 2021 |
|
| 3,750 |
|
| 2022 |
|
| 8,044 |
|
| 2023 |
|
| 2,750 |
|
| Thereafter |
|
| 52,836 |
|
|
|
| |||
|
|
| |||
| Total |
| $ | 76,898 |
|
|
|
|
|
|
|
NOTE 13 — INCOME TAXES
Recent Tax Legislation
On December 22, 2017, the TCJA was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. The TCJA required us to incur a one-time transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA also reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. For fiscal year 2018, our blended U.S. federal statutory tax rate is 28.1%. This is the result of using the tax rate of 35% for the first and second quarter of fiscal year 2018 and the reduced tax rate of 21% for the third and fourth quarter of fiscal year 2018. The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. The GILTI and BEAT provisions of the TCJA will be effective for us beginning July 1, 2018.
The TCJA was effective in the second quarter of fiscal year 2018. As of June 30, 2018, we have not completed our accounting for the estimated tax effects of the TCJA. During fiscal year 2018, we recorded a provisional net charge of $13.7 billion related to the TCJA based on reasonable estimates for those tax effects. Due to the timing of the enactment and the complexity in applying the provisions of the TCJA, the provisional net charge is subject to revisions as we continue to complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the estimated tax effects of the TCJA will be completed during the measurement period, which is not expected to extend beyond one year from the enactment date. The impacts of our estimates are described further below.
During fiscal year 2018, we recorded an estimated net charge of $13.7 billion related to the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.9 billion, offset in part by the impact of changes in the tax rate of $4.2 billion, primarily on deferred tax assets and liabilities.
We recorded an estimated $17.9 billion charge in fiscal year 2018 related to the transition tax, which was included in the provision for income taxes in our consolidated income statements and income taxes in our consolidated balance sheets. We have not yet completed our accounting for the transition tax as our analysis of deferred foreign income is not complete. To calculate the transition tax, we estimated our deferred foreign income for fiscal year 2018 because these tax returns are not complete or due. Fiscal year 2018 taxable income will be known once the respective tax returns are completed and filed. In addition, U.S. and foreign audit settlements may significantly impact the estimated transition tax. The impact of the U.S. and foreign audits on the transition tax will be known as the audits are concluded.
81
PART II
Item 8
In addition, we recorded an estimated $4.2 billion benefit in fiscal year 2018 from the impact of changes in the tax rate, primarily on deferred tax assets and liabilities, which was included in provision for income taxes in our consolidated income statements and deferred income taxes and long-term income taxes in our consolidated balance sheets. We remeasured our deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods.
The TCJA subjects a U.S. corporation to tax on its GILTI. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the TCJA and the application of GAAP. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into our measurement of deferred taxes. We elected the deferred method, and the corresponding deferred tax assets and liabilities are included in the table of deferred income tax assets and liabilities below.
On August 1, 2018, the Internal Revenue Service published on its website proposed regulations relating to the transition tax imposed by the TCJA. Once published in the Federal Register, the proposed regulations are subject to a 60-day comment period. Final regulations are expected to be issued after consideration of comments. We are currently evaluating the impact of the proposed regulations.
Provision for Income Taxes
The components of the provision for income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | 19,764 |
|
| $ | 2,739 |
|
| $ | 545 |
|
| U.S. state and local |
|
| 934 |
|
|
| 30 |
|
|
| 136 |
|
| Foreign |
|
| 4,348 |
|
|
| 2,472 |
|
|
| 1,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current taxes |
| $ | 25,046 |
|
| $ | 5,241 |
|
| $ | 2,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | (4,292 | ) |
| $ | (554 | ) |
| $ | 1,919 |
|
| U.S. state and local |
|
| (458 | ) |
|
| 269 |
|
|
| 111 |
|
| Foreign |
|
| (393 | ) |
|
| (544 | ) |
|
| 449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred taxes |
| $ | (5,143 | ) |
| $ | (829 | ) |
| $ | 2,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
| $ | 19,903 |
|
| $ | 4,412 |
|
| $ | 5,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| U.S. |
| $ | 11,527 |
|
| $ | 6,843 |
|
| $ | 5,125 |
|
| Foreign |
|
| 24,947 |
|
|
| 23,058 |
|
|
| 20,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
| $ | 36,474 |
|
| $ | 29,901 |
|
| $ | 25,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
PART II
Item 8
Effective Tax Rate
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Federal statutory rate |
|
| 28.1% |
|
|
| 35.0% |
|
|
| 35.0% |
|
| Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign earnings taxed at lower rates |
|
| (7.8)% |
|
|
| (11.6)% |
|
|
| (14.5)% |
|
| Impacts of TCJA |
|
| 37.7% |
|
|
| 0% |
|
|
| 0% |
|
| Phone business losses |
|
| 0% |
|
|
| (5.7)% |
|
|
| 1.0% |
|
| Excess tax benefits relating to stock-based compensation |
|
| (2.5)% |
|
|
| (2.1)% |
|
|
| (1.6)% |
|
| Interest, net |
|
| 1.2% |
|
|
| 1.4% |
|
|
| 0.9% |
|
| Other reconciling items, net |
|
| (2.1)% |
|
|
| (2.2)% |
|
|
| (0.9)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effective rate |
|
| 54.6% |
|
|
| 14.8% |
|
|
| 19.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase from the federal statutory rate in fiscal year 2018 is primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, offset in part by earnings taxed at lower rates in foreign jurisdictions. The decrease from the federal statutory rate in fiscal year 2017 and 2016 is primarily due to earnings taxed at lower rates in foreign jurisdictions. Our foreign regional operating centers in Ireland, Singapore and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 87%, 76%, and 91% of our foreign income before tax in fiscal years 2018, 2017, and 2016, respectively. Other reconciling items, net consists primarily of tax credits, U.S. state income taxes, and domestic production activities deduction. In fiscal years 2018, 2017, and 2016, there were no individually significant other reconciling items.
The increase in our effective tax rate for fiscal year 2018 compared to fiscal year 2017 was primarily due to the net charge related to the enactment of the TCJA and the realization of tax benefits attributable to previous Phone business losses in fiscal year 2017. The decrease in our effective tax rate for fiscal year 2017 compared to fiscal year 2016 was primarily due to the realization of tax benefits attributable to previous Phone business losses, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries.
83
PART II
Item 8
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
| ||||
| June 30, |
| 2018 |
|
| 2017 |
| ||||
|
|
|
| ||||||||
| Deferred Income Tax Assets |
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Stock-based compensation expense |
| $ | 460 |
|
| $ | 777 |
| ||
| Accruals, reserves, and other expenses |
|
| 1,832 |
|
|
| 1,859 |
| ||
| Loss and credit carryforwards |
|
| 3,369 |
|
|
| 4,809 |
| ||
| Depreciation and amortization |
|
| 351 |
|
|
| 53 |
| ||
| Other |
|
| 56 |
|
|
| 255 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred income tax assets |
|
| 6,068 |
|
|
| 7,753 |
| ||
| Less valuation allowance |
|
| (3,186 | ) |
|
| (3,310 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred income tax assets, net of valuation allowance |
| $ | 2,882 |
|
| $ | 4,443 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Foreign earnings |
| $ | 0 |
|
| $ | (1,134 | ) | ||
| Unrealized gain on investments and debt |
|
| 0 |
|
|
| (1,384 | ) | ||
| Unearned revenue |
|
| (639 | ) |
|
| (5,760 | ) | ||
| Depreciation and amortization |
|
| (1,103 | ) |
|
| (1,630 | ) | ||
| Other |
|
| (312 | ) |
|
| (21 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Deferred income tax liabilities |
| $ | (2,054 | ) |
| $ | (9,929 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Net deferred income tax assets (liabilities) |
| $ | 828 |
|
| $ | (5,486 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Reported As |
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||||
| Other long-term assets |
| $ | 1,369 |
|
| $ | 248 |
| ||
| Long-term deferred income tax liabilities |
|
| (541 | ) |
|
| (5,734 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
| Net deferred income tax assets (liabilities) |
| $ | 828 |
|
| $ | (5,486 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
We recorded a deferred tax liability of $7.4 billion related to the recognition of revenue as part of the adoption of the new revenue standard.
As of June 30, 2018, we had federal, state and foreign net operating loss carryforwards of $257 million, $1.4 billion and $11.4 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2019 through 2038, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation, but are expected to be realized with the exception of those which have a valuation allowance.
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
Income taxes paid, net of refunds, were $5.5 billion, $2.4 billion, and $3.9 billion in fiscal years 2018, 2017, and 2016, respectively.
Uncertain Tax Positions
Unrecognized tax benefits as of June 30, 2018, 2017, and 2016, were $12.0 billion, $11.7 billion, and $10.2 billion, respectively, and were included in long-term income taxes in our consolidated balance sheets. If recognized, these tax benefits would affect our effective tax rates for fiscal years 2018, 2017, and 2016, by $11.3 billion, $10.2 billion, and $8.8 billion, respectively.
84
PART II
Item 8
As of June 30, 2018, 2017, and 2016, we had accrued interest expense related to uncertain tax positions of $3.0 billion, $2.3 billion, and $1.9 billion, respectively, net of income tax benefits. Interest expense on unrecognized tax benefits, net of tax effects, was $688 million, $399 million, and $163 million in fiscal years 2018, 2017, and 2016, respectively, and was included in provision for income taxes.
The aggregate changes in the balance of unrecognized tax benefits were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Balance, beginning of year |
| $ | 11,737 |
|
| $ | 10,164 |
|
| $ | 9,599 |
|
| Decreases related to settlements |
|
| (193 | ) |
|
| (4 | ) |
|
| (201 | ) |
| Increases for tax positions related to the current year |
|
| 1,445 |
|
|
| 1,277 |
|
|
| 1,086 |
|
| Increases for tax positions related to prior years |
|
| 151 |
|
|
| 397 |
|
|
| 115 |
|
| Decreases for tax positions related to prior years |
|
| (1,176 | ) |
|
| (49 | ) |
|
| (317 | ) |
| Decreases due to lapsed statutes of limitations |
|
| (3 | ) |
|
| (48 | ) |
|
| (118 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of year |
| $ | 11,961 |
|
| $ | 11,737 |
|
| $ | 10,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While we settled a portion of the IRS audit for tax years 2004 to 2006 during the third quarter of fiscal year 2011, and a portion of the IRS audit for tax years 2007 to 2009 during the first quarter of fiscal year 2016, we remain under audit for those years. In the second quarter of fiscal year 2018, we settled a portion of the IRS audit for tax years 2010 to 2013. We continue to be subject to examination by the IRS for tax years 2010 to 2017. In February 2012, the IRS withdrew its 2011 Revenue Agents Report for tax years 2004 to 2006 and reopened the audit phase of the examination. As of June 30, 2018, the primary unresolved issue relates to transfer pricing, which could have a significant impact in our consolidated financial statements if not resolved favorably. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2017, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.
NOTE 14 — RESTRUCTURING CHARGES
2016 Restructuring
In the fourth quarter of fiscal year 2016, management approved restructuring plans that resulted in approximately 4,700 job eliminations in fiscal year 2017, primarily across our smartphone hardware business and global sales. In fiscal year 2016, we incurred restructuring charges of $501 million in connection with the 2016 restructuring plans, including severance expenses and other reorganization costs. The actions associated with these restructuring plans were completed as of June 30, 2017.
2017 Restructuring
In June 2017, management approved a sales and marketing restructuring plan. In fiscal year 2017, we recorded employee severance expenses of $306 million primarily related to this sales and marketing restructuring plan. The actions associated with this restructuring plan were completed as of June 30, 2018.
85
PART II
Item 8
NOTE 15 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2018 |
|
| 2017 |
| ||
|
|
|
| ||||||
| Productivity and Business Processes |
| $ | 14,864 |
|
| $ | 12,692 |
|
| Intelligent Cloud |
|
| 14,706 |
|
|
| 11,152 |
|
| More Personal Computing |
|
| 3,150 |
|
|
| 2,812 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | 32,720 |
|
| $ | 26,656 |
|
|
|
|
|
|
|
|
|
|
|
The opening balance of unearned revenue was $22.2 billion as of July 1, 2016.
Changes in unearned revenue were as follows:
| (In millions) |
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
| Year Ended June 30, 2018 |
|
|
|
|
|
|
| |||
| Balance, beginning of period |
| $ | 26,656 |
|
| Deferral of revenue |
|
| 61,142 |
|
| Recognition of unearned revenue |
|
| (55,078 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | 32,720 |
|
|
|
|
|
|
|
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted not recognized revenue was $73 billion as of June 30, 2018, of which we expect to recognize approximately 60% of the revenue over the next 12 months and the remainder thereafter.
NOTE 16 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Year Ended June 30, |
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||||
| Operating lease cost |
| $ | 1,585 |
|
| $ | 1,412 |
|
| $ | 936 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Amortization of right-of-use assets |
| $ | 243 |
|
| $ | 104 |
|
| $ | 28 |
| ||
| Interest on lease liabilities |
|
| 175 |
|
|
| 68 |
|
|
| 28 |
| ||
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Total finance lease cost |
| $ | 418 |
|
| $ | 172 |
|
| $ | 56 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
86
PART II
Item 8
Supplemental cash flow information related to leases was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Year Ended June 30, |
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||||
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Operating cash flows from operating leases |
| $ | 1,522 |
|
| $ | 1,157 |
|
| $ | 936 |
| ||
| Operating cash flows from finance leases |
|
| 175 |
|
|
| 68 |
|
|
| 28 |
| ||
| Financing cash flows from finance leases |
|
| 144 |
|
|
| 46 |
|
|
| 6 |
| ||
|
|
|
|
|
|
|
|
|
|
| |||||
| Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Operating leases |
|
| 1,571 |
|
|
| 1,270 |
|
|
| 1,062 |
| ||
| Finance leases |
|
| 1,933 |
|
|
| 1,773 |
|
|
| 413 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||
| June 30, |
| 2018 |
|
| 2017 |
| ||
|
|
|
| ||||||
| Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating lease right-of-use assets |
| $ | 6,686 |
|
| $ | 6,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | 1,399 |
|
| $ | 1,423 |
|
| Operating lease liabilities |
|
| 5,568 |
|
|
| 5,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating lease liabilities |
| $ | 6,967 |
|
| $ | 6,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, gross |
| $ | 4,543 |
|
| $ | 2,658 |
|
| Accumulated depreciation |
|
| (404 | ) |
|
| (161 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
| $ | 4,139 |
|
| $ | 2,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | 176 |
|
| $ | 113 |
|
| Other long-term liabilities |
|
| 4,125 |
|
|
| 2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease liabilities |
| $ | 4,301 |
|
| $ | 2,538 |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| 7 years |
|
|
| 7 years |
|
| Finance leases |
|
| 13 years |
|
|
| 13 years |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| 2.7% |
|
|
| 2.5% |
|
| Finance leases |
|
| 5.2% |
|
|
| 4.7% |
|
|
|
|
|
|
|
|
|
|
|
Maturities of lease liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Year Ending June 30, |
| Operating Leases |
|
| Finance Leases |
| ||
|
|
|
| ||||||
| 2019 |
| $ | 1,492 |
|
| $ | 386 |
|
| 2020 |
|
| 1,347 |
|
|
| 393 |
|
| 2021 |
|
| 1,086 |
|
|
| 401 |
|
| 2022 |
|
| 902 |
|
|
| 408 |
|
| 2023 |
|
| 721 |
|
|
| 410 |
|
| Thereafter |
|
| 2,157 |
|
|
| 4,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease payments |
|
| 7,705 |
|
|
| 6,034 |
|
| Less imputed interest |
|
| (738 | ) |
|
| (1,733 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 6,967 |
|
| $ | 4,301 |
|
|
|
|
|
|
|
|
|
|
|
87
PART II
Item 8
As of June 30, 2018, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $594 million and $2.4 billion, respectively. These operating and finance leases will commence between fiscal year 2019 and fiscal year 2020 with lease terms of 1 year to 20 years.
NOTE 17 — CONTINGENCIES
Patent and Intellectual Property Claims
There were 34 patent infringement cases pending against Microsoft as of June 30, 2018, none of which are material individually or in aggregate.
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.
The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions, and have submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The courts will likely reach a decision on approval in September 2018.
Other Antitrust Litigation and Claims
China State Administration for Industry and Commerce Investigation
In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAMR has stated the investigation relates to compatibility, bundle sales, file verification issues related to Windows and Office software, and potentially other issues.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 35 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.
In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal challenging the standard for evaluating expert scientific evidence, which the District of Columbia Court of Appeals heard en banc. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike.
88
PART II
Item 8
Canadian Cell Phone Class Action
Microsoft Mobile Oy, along with other handset manufacturers and network operators, is a defendant in a 2013 class action lawsuit filed in the Supreme Court of British Columbia by a purported class of Canadians who have used cellular phones for at least 1,600 hours, including a subclass of users with brain tumors, alleging adverse health effects from cellular phone use. Microsoft was served with the complaint in June 2014 and has been substituted for the Nokia defendants. The litigation has been dormant for more than three years.
Employment-Related Litigation
Moussouris v. Microsoft
Current and former female Microsoft employees in certain engineering and information technology roles brought this class action in federal court in Seattle in 2015, alleging systemic gender discrimination in pay and promotions. The plaintiffs moved to certify the class in October 2017. Microsoft filed an opposition in January 2018, attaching an expert report showing no statistically significant disparity in pay and promotions between similarly situated men and women. In June 2018, the court denied the plaintiffs’ motion for class certification. The plaintiffs have appealed to the U.S. Court of Appeals for the Ninth Circuit. In July, the court denied Microsoft’s motion for summary judgment with respect to the named plaintiffs.
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2018, we accrued aggregate legal liabilities of $323 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $1.1 billion in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.
Indemnifications
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. In evaluating estimated losses on these obligations, we consider factors such as the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material impact in our consolidated financial statements during the periods presented.
NOTE 18 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Balance, beginning of year |
|
| 7,708 |
|
|
| 7,808 |
|
|
| 8,027 |
|
| Issued |
|
| 68 |
|
|
| 70 |
|
|
| 75 |
|
| Repurchased |
|
| (99 | ) |
|
| (170 | ) |
|
| (294 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of year |
|
| 7,677 |
|
|
| 7,708 |
|
|
| 7,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
PART II
Item 8
Share Repurchases
On September 16, 2013, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program became effective on October 1, 2013, and was completed on December 22, 2016.
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional $40.0 billion in share repurchases. This share repurchase program commenced on December 22, 2016 following completion of the prior program approved on September 16, 2013, has no expiration date, and may be suspended or discontinued at any time without notice. As of June 30, 2018, $28.2 billion remained of this $40.0 billion share repurchase program.
We repurchased the following shares of common stock under the share repurchase programs:
| (In millions) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| First Quarter |
|
| 22 |
|
| $ | 1,600 |
|
|
| 63 |
|
| $ | 3,550 |
|
|
| 89 |
|
| $ | 4,000 |
|
| Second Quarter |
|
| 22 |
|
|
| 1,800 |
|
|
| 59 |
|
|
| 3,533 |
|
|
| 66 |
|
|
| 3,600 |
|
| Third Quarter |
|
| 34 |
|
|
| 3,100 |
|
|
| 25 |
|
|
| 1,600 |
|
|
| 69 |
|
|
| 3,600 |
|
| Fourth Quarter |
|
| 21 |
|
|
| 2,100 |
|
|
| 23 |
|
|
| 1,600 |
|
|
| 70 |
|
|
| 3,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
|
| 99 |
|
| $ | 8,600 |
|
|
| 170 |
|
| $ | 10,283 |
|
|
| 294 |
|
| $ | 14,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased beginning in the third quarter of fiscal year 2017 were under the share repurchase program approved September 20, 2016. All other shares repurchased were under the share repurchase program approved September 16, 2013. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards. All repurchases were made using cash resources.
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Dividend Per Share |
|
| Record Date |
| Amount |
|
| Payment Date |
| ||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
| Fiscal Year 2018 |
|
|
|
|
| (in millions) |
|
|
|
| ||||||
|
|
|
|
|
| ||||||||||||
| September 19, 2017 |
| $ | 0.42 |
|
|
| November 16, 2017 |
|
| $ | 3,238 |
|
|
| December 14, 2017 |
|
| November 29, 2017 |
|
| 0.42 |
|
|
| February 15, 2018 |
|
|
| 3,232 |
|
|
| March 8, 2018 |
|
| March 12, 2018 |
|
| 0.42 |
|
|
| May 17, 2018 |
|
|
| 3,226 |
|
|
| June 14, 2018 |
|
| June 13, 2018 |
|
| 0.42 |
|
|
| August 16, 2018 |
|
|
| 3,224 |
|
|
| September 13, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 20, 2016 |
| $ | 0.39 |
|
|
| November 17, 2016 |
|
| $ | 3,024 |
|
|
| December 8, 2016 |
|
| November 30, 2016 |
|
| 0.39 |
|
|
| February 16, 2017 |
|
|
| 3,012 |
|
|
| March 9, 2017 |
|
| March 14, 2017 |
|
| 0.39 |
|
|
| May 18, 2017 |
|
|
| 3,009 |
|
|
| June 8, 2017 |
|
| June 13, 2017 |
|
| 0.39 |
|
|
| August 17, 2017 |
|
|
| 3,003 |
|
|
| September 14, 2017 |
|
|
|
| |||||||||||||||
The dividend declared on June 13, 2018 was included in other current liabilities as of June 30, 2018.
90
PART II
Item 8
NOTE 19 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | 134 |
|
| $ | 352 |
|
| $ | 590 |
|
| Unrealized gains, net of tax of $11, $4, and $24 |
|
| 218 |
|
|
| 328 |
|
|
| 351 |
|
| Reclassification adjustments for gains included in revenue |
|
| (185 | ) |
|
| (555 | ) |
|
| (625 | ) |
| Tax expense included in provision for income taxes |
|
| 6 |
|
|
| 9 |
|
|
| 36 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated other comprehensive income |
|
| (179 | ) |
|
| (546 | ) |
|
| (589 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives, net of tax of $5, $(5), and $(12) |
|
| 39 |
|
|
| (218 | ) |
|
| (238 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | 173 |
|
| $ | 134 |
|
| $ | 352 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | 1,825 |
|
| $ | 2,941 |
|
| $ | 3,169 |
|
| Unrealized gains (losses), net of tax of $(427), $267, and $120 |
|
| (1,146 | ) |
|
| 517 |
|
|
| 219 |
|
| Reclassification adjustments for gains included in other income (expense), net |
|
| (2,309 | ) |
|
| (2,513 | ) |
|
| (688 | ) |
| Tax expense included in provision for income taxes |
|
| 738 |
|
|
| 880 |
|
|
| 241 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Amounts reclassified from accumulated other comprehensive income |
|
| (1,571 | ) |
|
| (1,633 | ) |
|
| (447 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net change related to investments, net of tax of $(1,165), $(613), and $(121) |
|
| (2,717 | ) |
|
| (1,116 | ) |
|
| (228 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | (892 | ) |
| $ | 1,825 |
|
| $ | 2,941 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | (1,332 | ) |
| $ | (1,499 | ) |
| $ | (1,237 | ) |
| Translation adjustments and other, net of tax effects of $0, $9, and $(33) |
|
| (178 | ) |
|
| 167 |
|
|
| (262 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | (1,510 | ) |
| $ | (1,332 | ) |
| $ | (1,499 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative effect of accounting change |
|
| 42 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss), end of period |
| $ | (2,187 | ) |
| $ | 627 |
|
| $ | 1,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 20 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. As of June 30, 2018, an aggregate of 381 million shares were authorized for future grant under our stock plans. In fiscal year 2018, our Board of Directors approved the 2017 Stock Plan, which authorized an additional 308 million shares for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.
Stock-based compensation expense and related income tax benefits were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Stock-based compensation expense |
| $ | 3,940 |
|
| $ | 3,266 |
|
| $ | 2,668 |
|
| Income tax benefits related to stock-based compensation |
|
| 823 |
|
|
| 1,066 |
|
|
| 882 |
|
|
|
| |||||||||||
91
PART II
Item 8
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a four or five-year service period.
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a four-year service period. PSUs generally vest over a three-year performance period. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Dividends per share (quarterly amounts) |
|
| $0.39 - $0.42 |
|
|
| $0.36 - $0.39 |
|
|
| $0.31 - $0.36 |
|
| Interest rates |
|
| 1.7% - 2.9% |
|
|
| 1.2% - 2.2% |
|
|
| 1.1% - 1.8% |
|
|
|
| |||||||||||
During fiscal year 2018, the following activity occurred under our stock plans:
| Shares |
|
| Weighted Average Grant-Date Fair Value |
| ||||
|
|
| |||||||
|
|
| |||||||
| (In millions) |
|
|
|
| ||||
|
| ||||||||
| Stock Awards |
| |||||||
|
|
|
| ||||||
| Nonvested balance, beginning of year |
|
| 201 |
|
| $ | 46.32 |
|
| Granted (a) |
|
| 70 |
|
|
| 75.88 |
|
| Vested |
|
| (80 | ) |
|
| 45.74 |
|
| Forfeited |
|
| (17 | ) |
|
| 53.41 |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Nonvested balance, end of year |
|
| 174 |
|
|
| 57.85 |
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes 3 million, 2 million, and 1 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2018, 2017, and 2016, respectively. |
As of June 30, 2018, there was approximately $7.0 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of 3 years. The weighted average grant-date fair value of stock awards granted was $75.88, $55.64, and $41.51 for fiscal years 2018, 2017, and 2016, respectively. The fair value of stock awards vested was $6.6 billion, $4.8 billion, and $3.9 billion, for fiscal years 2018, 2017, and 2016, respectively.
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Employees purchased the following shares during the periods presented:
| (Shares in millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Shares purchased |
|
| 13 |
|
|
| 13 |
|
|
| 15 |
|
| Average price per share |
| $ | 76.40 |
|
| $ | 56.36 |
|
| $ | 44.83 |
|
|
|
| |||||||||||
As of June 30, 2018, 116 million shares of our common stock were reserved for future issuance through the ESPP.
92
PART II
Item 8
Savings Plan
We have a savings plan in the U.S. that qualifies under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Participating U.S. employees may contribute a portion of their salary, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes in this plan, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Matching contributions for all plans were $807 million, $734 million, and $549 million in fiscal years 2018, 2017, and 2016, respectively, and were expensed as contributed.
NOTE 21 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
|
| • | Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Skype for Business, and Microsoft Teams, and related Client Access Licenses (“CALs”). |
|
| • | Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive. |
|
| • | LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions. |
|
| • | Dynamics business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises, and Dynamics 365, a set of cloud-based applications across ERP and CRM. |
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:
|
| • | Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, and Azure. |
|
| • | Enterprise Services, including Premier Support Services and Microsoft Consulting Services. |
More Personal Computing
Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and IT professionals across all devices. This segment primarily comprises:
|
| • | Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things (“IoT”); and MSN advertising. |
|
| • | Devices, including Microsoft Surface, PC accessories, and other intelligent devices. |
|
| • | Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, and advertising (“Xbox Live”), video games, and third-party video game royalties. |
|
| • | Search. |
93
PART II
Item 8
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: legal, including settlements and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments, including impairment and restructuring expenses.
Segment revenue and operating income were as follows during the periods presented:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | 35,865 |
|
| $ | 29,870 |
|
| $ | 25,792 |
|
| Intelligent Cloud |
|
| 32,219 |
|
|
| 27,407 |
|
|
| 24,952 |
|
| More Personal Computing |
|
| 42,276 |
|
|
| 39,294 |
|
|
| 40,410 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 110,360 |
|
| $ | 96,571 |
|
| $ | 91,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | 12,924 |
|
| $ | 11,389 |
|
| $ | 11,756 |
|
| Intelligent Cloud |
|
| 11,524 |
|
|
| 9,127 |
|
|
| 9,249 |
|
| More Personal Computing |
|
| 10,610 |
|
|
| 8,815 |
|
|
| 6,183 |
|
| Corporate and Other |
|
| 0 |
|
|
| (306 | ) |
|
| (1,110 | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 35,058 |
|
| $ | 29,025 |
|
| $ | 26,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other operating loss comprised impairment and restructuring expenses.
No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the fiscal years 2018, 2017, or 2016. Revenue, classified by the major geographic areas in which our customers are located, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| United States (a) |
| $ | 55,926 |
|
| $ | 51,078 |
|
| $ | 46,416 |
|
| Other countries |
|
| 54,434 |
|
|
| 45,493 |
|
|
| 44,738 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 110,360 |
|
| $ | 96,571 |
|
| $ | 91,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue. |
94
PART II
Item 8
Revenue from external customers, classified by significant product and service offerings, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| Office products and cloud services |
| $ | 28,316 |
|
| $ | 25,573 |
|
| $ | 23,868 |
|
| Server products and cloud services |
|
| 26,129 |
|
|
| 21,649 |
|
|
| 19,062 |
|
| Windows |
|
| 19,518 |
|
|
| 18,593 |
|
|
| 17,548 |
|
| Gaming |
|
| 10,353 |
|
|
| 9,051 |
|
|
| 9,202 |
|
| Search advertising |
|
| 7,012 |
|
|
| 6,219 |
|
|
| 5,428 |
|
| Enterprise Services |
|
| 5,846 |
|
|
| 5,542 |
|
|
| 5,659 |
|
| Devices |
|
| 5,134 |
|
|
| 5,062 |
|
|
| 7,888 |
|
| |
|
| 5,259 |
|
|
| 2,271 |
|
|
| 0 |
|
| Other |
|
| 2,793 |
|
|
| 2,611 |
|
|
| 2,499 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 110,360 |
|
| $ | 96,571 |
|
| $ | 91,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our commercial cloud revenue, which primarily comprises Office 365 commercial, Azure, Dynamics 365, and other cloud properties, was $23.2 billion, $14.9 billion, and $9.5 billion in fiscal years 2018, 2017, and 2016, respectively. These amounts are primarily included in Office products and services and server products and cloud services in the table above.
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment; it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| June 30, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
|
|
|
|
| |||||||||
| United States |
| $ | 44,501 |
|
| $ | 42,730 |
|
| $ | 25,145 |
|
| Ireland |
|
| 12,843 |
|
|
| 12,889 |
|
|
| 2,099 |
|
| Luxembourg |
|
| 6,856 |
|
|
| 6,854 |
|
|
| 6,868 |
|
| Other countries |
|
| 15,682 |
|
|
| 13,044 |
|
|
| 11,047 |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 79,882 |
|
| $ | 75,517 |
|
| $ | 45,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
PART II
Item 8
NOTE 22 — QUARTERLY INFORMATION (UNAUDITED)
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| September 30 |
|
| December 31 |
|
| March 31 |
|
| June 30 |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 24,538 |
|
| $ | 28,918 |
|
| $ | 26,819 |
|
| $ | 30,085 |
|
| $ | 110,360 |
|
| Gross margin |
|
| 16,260 |
|
|
| 17,854 |
|
|
| 17,550 |
|
|
| 20,343 |
|
|
| 72,007 |
|
| Operating income |
|
| 7,708 |
|
|
| 8,679 |
|
|
| 8,292 |
|
|
| 10,379 |
|
|
| 35,058 |
|
| Net income (loss) (a) |
|
| 6,576 |
|
|
| (6,302 | ) |
|
| 7,424 |
|
|
| 8,873 |
|
|
| 16,571 |
|
| Basic earnings (loss) per share |
|
| 0.85 |
|
|
| (0.82 | ) |
|
| 0.96 |
|
|
| 1.15 |
|
|
| 2.15 |
|
| Diluted earnings (loss) per share (b) |
|
| 0.84 |
|
|
| (0.82 | ) |
|
| 0.95 |
|
|
| 1.14 |
|
|
| 2.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2017 (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 21,928 |
|
| $ | 25,826 |
|
| $ | 23,212 |
|
| $ | 25,605 |
|
| $ | 96,571 |
|
| Gross margin |
|
| 14,084 |
|
|
| 15,925 |
|
|
| 15,152 |
|
|
| 17,149 |
|
|
| 62,310 |
|
| Operating income |
|
| 6,715 |
|
|
| 7,905 |
|
|
| 6,723 |
|
|
| 7,682 | (d) |
|
| 29,025 | (d) |
| Net income |
|
| 5,667 |
|
|
| 6,267 |
|
|
| 5,486 |
|
|
| 8,069 | (d) |
|
| 25,489 | (d) |
| Basic earnings per share |
|
| 0.73 |
|
|
| 0.81 |
|
|
| 0.71 |
|
|
| 1.05 |
|
|
| 3.29 |
|
| Diluted earnings per share |
|
| 0.72 |
|
|
| 0.80 |
|
|
| 0.70 |
|
|
| 1.03 | (d) |
|
| 3.25 | (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Reflects the net charge (benefit) related to the TCJA of $13.8 billion for the second quarter, $(104) million for the fourth quarter, and $13.7 billion for fiscal year 2018. |
| (b) | Reflects the net charge (benefit) related to the TCJA, which decreased (increased) diluted EPS $1.78 for the second quarter, $(0.01) for the fourth quarter, and $1.75 for fiscal year 2018. |
| (c) | On December 8, 2016, we acquired LinkedIn Corporation. LinkedIn has been included in our consolidated results of operations starting on the acquisition date. |
| (d) | Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.04, respectively. |
96
PART II
Item 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 3, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principles
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers and for accounting for leases in fiscal year 2018 due to the adoption of the new revenue standard and new lease standard, respectively. The Company adopted the new revenue standard using the full retrospective approach and adopted the new lease standard using a modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
August 3, 2018
We have served as the Company’s auditor since 1983.
97
PART II
Item 9, 9A